A renovation can not only maintain the value of your property, but also increase it. Those who know the difference between value-preserving and value-enhancing investments are well advised. When it comes to saving taxes, a distinction must be made between the two types of investment. In this article, you will find out how the two investments differ from each other, what exceptions there are and how you can save tax when renovating or making an investment.
Regardless of whether you own your own home or a rented property – after a certain period of time, repairs need to be carried out on the property. In Switzerland, the average age of houses and residential complexes is 45 years, and a significant proportion even date back to before the Second World War. According to RaiffeisenCasa, around 1.5 million homes are either not insulated or poorly insulated and therefore in need of energy-efficient renovation.
What are value-enhancing investments?
According to the Zurich Tax Book , value-enhancing expenses can be defined as those that improve the condition of the property, increase the utility value of the property, reduce recurring operating costs and thus improve the value of the property or land. As a simple rule of thumb, value-enhancing investments can be summarized as follows: A value-enhancing investment is generally anything that is “new” or “additional”. If, for example, a conservatory or fireplace is added or a well-functioning bathroom is converted into a wellness oasis, these are considered value-enhancing investments. The measures are not necessary for the maintenance of the property, but generate added value. Ideally, it is precisely this added value that causes the price of the property to rise.
If a property valuation is carried out, 100% of the costs can often be offset. Thanks to the investment in your own home, you can also achieve a higher sales price or an increase in the rent. If you can increase the rent or the sales price, this is known as the “return on investment”, or ROI for short. A rent increase is not permitted in all cases. A rent increase by the landlord is only permissible in the case of value-enhancing renovations. However, the rent increase may only be notified once the work has been carried out and the relevant supporting documents have been submitted. The landlord may not demand more money during or before the renovation, i.e. no rent increase may take place before completion.
Divide up extensive renovation work. Deductions are therefore possible in both tax periods, which has a favourable effect on progression.
Value-generating expenses are not tax-deductible. One exception is investments that serve to save energy and protect the environment. The Federal Department of Finance, in cooperation with the cantons, determines which investments are to be treated as maintenance costs. Half of investments with an energy-saving effect are deductible in the first five years after the acquisition of the property and fully deductible thereafter.
Measures with an energy-saving effect include expenses that reduce energy losses in the building envelope or contribute to the rational use of technical building systems, the implementation of energy analyses for energy concepts and the replacement of household appliances with increased electricity consumption.
If the landlord makes value-enhancing investments in his property, this can have consequences for the tenant. Value-enhancing investments can be partially added to the tenant’s rent.
What are value-preserving investments?
Unlike value-enhancing measures, value-preserving investments are necessary work that goes towards maintaining the property. These can also be described as maintenance costs. Maintenance therefore includes the costs of measures that serve to preserve value. Expenses are considered to be value-preserving if they compensate for the wear and tear of the property or if installations are replaced. The following rule of thumb applies to maintenance: Maintenance is the restoration of a previous condition.
Costs arising from the area of maintenance are tax deductible. Tax-privileged measures include, for example, simple work such as replacing floor coverings or painting the walls. On the other hand, larger budget items such as the renewal of the kitchen or sanitary installations and repairs to the façade are also taken into account – these are all maintenance costs.
Unlike in the case of value-enhancing expenses, the landlord cannot add the costs of renovation to the tenant’s rent. Maintenance work does not change the tenant’s living situation and an increase in rent is not justified.
Combine small investments and make them in one year: this allows you to increase the amount of the standard deduction.
However, value-enhancing and value-preserving investments cannot always be clearly separated. It is quite common for renovation measures to have both a value-preserving and a value-enhancing component. For example, if a simple, old bathroom is replaced by a modern, luxurious bathroom, the value of the work must be apportioned. In such cases, the value-preserving part is deductible, but the value-enhancing part remains non-deductible.
Save taxes
The tax deductions for value-preserving renovations can be calculated using either the flat-rate deductions or the actual costs. With the federal government, but also with most cantons, you can decide each year whether you want to deduct the flat-rate deduction or the actual maintenance costs from your taxes. Deductions from taxes and thus indirect tax savings are generally worthwhile, depending on the canton, especially for newer properties, whereas the actual repair and maintenance costs for older houses tend to be higher and thus, with deduction of the actual costs, a greater tax relief can be provided. Despite possible tax savings, one must not forget that income relating to renting must also be taxed.
Combine small investments and make them in one year: this way you can increase the amount of the standard deduction.
However, value-enhancing and value-preserving investments cannot always be clearly separated. It is quite common for renovation measures to have both a value-preserving and a value-enhancing component. For example, if a simple, old bathroom is replaced by a modern, luxurious bathroom, the value of the work must be apportioned. In such cases, the value-preserving part is deductible, but the value-enhancing part remains non-deductible.
All data are without guarantee. The information on these Internet pages has been carefully researched. Nevertheless, no liability can be accepted for the accuracy of the information provided.
