Hello. I am in the process of buying a flat in AG, outside of the city I currently live in (rent). Before moving to the new location early in 2022, I want to refurbish the flat (1986, floor, kitchen, bathroom, paint job). If I start in 2021 with this (place of residence still unchanged), will I be able to profit from tax deductions for the work done (invoiced) in 2021 in the context of my tax filing 2021? The goal is to refurbish some things in 2021 and others in 2022+ in order to optimize tax-wise.
Yes. And as you mentioned, the date of the invoice is the determining factor.
It does not sound like it is the case that you will move between cantons, but if so then it becomes more complicated (your salary will be taxed in canton of residence on Dec 31, the rennovation will be deductible in the canton where the property is located )
At least in canton Bern it sometimes makes more sense to do it all in one year, because you can deduct a certain minimum amount even if you haven‘t spent anything.
Many thanks for your quick responses, very helpful! I will have to do some follow-up research. My main concern was related to the place of residency (i.e. not living in the new/own flat in 2021, which is in the same canton, btw.).
could you expand on this? My plan is to buy a house in AG and renovate it while still living in canton ZG (rented appt) over a year end to be taxable in Zug. Are the renovations not deductible in this case?
Also, someone living in ZH city mentioned that if you buy a house at a cheap price because it needs renovations, the tax authorities could refuse your tax deductions for the renovation costs, because you essentially paid already less than the house would be worth in good condition. Have you guys heard/seen that before?
edit: just found some information on this: I think this is called the “Dumont-Praxis” - not sure though
The principle as I understand it and that has been applied to me is that real estate and maintenance of real estate are taxable in the canton where the real esate is located
Your net salary in Zug after deductions (LPP, 3 pillar etc) 100k
Deemed rental value of property in AG 5k
Rennovation expenses (note: not capital improvements) 20k
Your taxable income in ZG is 100k
Your taxable income in AG is 0
Your global taxable income is 85k (=100 +5 -20)
=>You will pay tax on 100k in ZG but at the tax rate applicable to 85k. You should pay zero income tax in AG.
If AG has wealth tax you will pay wealth tax in AG based on the taxable value of the property, which may be lower than the purchase price
Above excludes interest. If you have a mortgage, or indeed any kind of loan such as margin loan on stocks, the debt and interest expense will be allocated between the 2 cantons based on the wealth in each canton (inter-cantonal allocation).
Obviously a house in need of renovations will be sold less than a freshly renovated house, so where would you draw the line on what could be deducted or not? Plus the catch in this situations is that when/if you sell the house the amounts claimed for renovation will be taxed as capital gains! (Which could potentially be even more than what you saved depending on timing of sale).
If I got I correctly let’s assume you buy a house at CHF 800K and you renovate it by putting another CHF 300k. Let’s assume that the authorities recognise CHF 200k as renovation and CHF 100k as value adding and you claim a tax deduction on the CHF 200k. When you sell (and hoping you are getting back purchase price + renovation) your capital gains would like this:
Sell price: CHF 1.1m
Purchase price: CHF 0.8m
Value added renovation: CHF 0.1m
Therefore your capital gains is CHF 200k and you will eventually be taxed on that…(potentially even more as the capital gains tax rate may be even higher than the saving of income tax) so I guess authorities would be fine for that
In general even though I have deducted renovation costs I don’t believe it makes such a big difference (unless you plan to keep forever) since you will eventually be taxed again when you sell. The only time when you won’t pay that back is if you sell at a lower price (which I guess is a worst scenario by itself…)
Indeed for rennovation it is important to distinguish between “maintenance” and “value adding / capital improvements”
Repainting a room or replacing a fridge = maintenance, deductible from income tax
Building a new bathroom = value adding improvement, not deductible from income tax but deductible from capital gains when selling
Great comments! Sticking with the AG example, tax deductions are regulated in detail, see the following document: https://www.ag.ch/media/kanton_aargau/dfr/dokumente_3/steuern/natuerliche_personen/merkblaetter_np/2020-07-01_MB_LUK_.pdf