What does the rental value mean for your taxes?

If you rent out a house or apartment, you have to pay tax on the rental earnings as income. But even if you use your home yourself, you still have to pay income tax on it, regardless of whether it is your primary residence or just a holiday home. The tax applies to the rental value. Simply put, the rental value corresponds to the rent that owners could charge if they did not live in their house or apartment themselves. You have to pay tax on this amount as income. In this article, we answer the most important questions about rental value.

How is the rental value calculated?

In principle, the cantons are free to decide which method they use to calculate the rental value. The Federal Court has merely stated that it must be at least 60 percent of the rent that could be charged for the apartment or house in question on the open market. The cantons usually aim for a target range of 60 to 90 percent of the rent that would be earned on the open market.

Different methods in the cantons

In all cantons, the basis for the rental value is the property value. The following calculation methods are used:

Comparison with similar or identical rented properties

AI, AR, GL, GR, LU, SG, SH, SZ, TI, UR, VS.

Individual assessment usually based on a hedonic computer model

AG, BE, FR, JU, NW, OW, TG collect the most important information about a property and compare it with similar properties from the database.

Specific cantonal estimate methods

• BL based on building insurance value (fire storage value) multiplied by a community-specific correction factor, as well as correction factors for age and condominium ownership
• BS based on building insurance value, age devaluation and land value (real assets)
• GE based on a questionnaire about living space, age, furnishings, etc.
• NE as a percentage of the income and asset value (cadastral value)
• SO based on construction value, market value and earnings value (cadastral value)
• VD based on living space corrected by various coefficients (age, location, comfort, etc.)
• ZG based on purchase price or market value
• ZH based on land and time construction value (market value)

The Confederation adopts the cantonal tax values only in AR, FR, GE, JU, LU, NE, SG, UR, TI, VS, ZG and ZH. In all other cantons, the Confederation charges different surcharges or grants only smaller discounts on the market values. It also does not allow any special deductions, such as those applied in individual cantons for first homes.

What if the rental value is above the relevant target range?

If the rental value is above the target range, you can enter a lower value in your tax return. However, you must provide good reasons for such a change if you want it to be successful. A strong argument, for example, is a similarly sized apartment in the same building that is rented out at a lower price. However, this must not be a preferential rent for family members or other affiliated parties. Poor sunlight, street noise, an obstructed view or outdated interior furnishings can also serve as reasons.

Can I dispute the amount of the rental value?

If the officially determined rental value exceeds the target range or if the tax office has not taken essential assessment criteria into account or has taken them into account insufficiently, it may be worthwhile lodging an objection. However, this must be well justified if it is to have any chance of success. The expertise of a professional real estate appraiser would be particularly useful. It does not cost anything to lodge an objection in the initial stage. However, if the case goes to court, the losing party must bear the costs. These can be high, because the court usually commissions an additional expert estimate. In view of the high costs and the complicated subject matter, it is always advisable to seek expert advice on rental value.

Where do I pay tax on the rental value?

The rental value is always taxable where the property is located. The main residence is therefore taxed in the tax domicile, while a holiday apartment or a holiday home is taxed in the relevant canton or country. For a property outside the canton, it is sufficient to send a copy of the tax return to the relevant canton. The cantons then regulate the distribution of tax revenue among themselves. You also have to declare a property abroad in Switzerland, but there is no double taxation. The relevant country has exclusive taxation rights. On the other hand, the rental value and tax value of the foreign property in Switzerland are taken into account when determining tax rates and, as a result, will lead to slightly higher taxes.

Who has to pay tax on the rental value?

All private owners with a tax domicile in Switzerland must pay tax on the rental value of their property as income and on its official value as assets. It doesn’t matter whether it is just a piece of land, a single-family home, an owner-occupied apartment, a second home in the same or another canton. A holiday home abroad must also be declared, but is included in the taxation only to determine the rate. Anyone renting out their apartment or house must pay tax on the net rental income actually achieved. If they are unable to rent out a property despite active efforts, they do not have to pay tax on the rental value.

How can you reduce the rental value?

If the official value and, as a result, the rental value are obviously too high, you can dispute the amount. A deduction on the rental value is permitted by the Confederation and, in the cantons of BL, GR, NW, OW, SH, SZ, SG, UR, ZG and ZH, if one or more rooms in the apartment or house are empty. The calculation formula for this “underuse deduction” differs from canton to canton. In cases where the rental value accounts for a disproportionately high percentage of taxable income, the cantons of GE, GR, LU, OW, SH, SG, VD and ZH have a hardship clause. This allows a special deduction that can reduce the rental value to as little as a third of taxable income.

What are the rules for holiday apartments?

If you own a holiday home, you also have to pay income and property taxes on it based on the rental value. And accordingly, you must also submit a tax return in the canton where the holiday home is located. It is sufficient, however, to fill out the tax return at your main residence and send a signed copy to the municipality of your second residence. The tax authorities then independently distribute the tax revenue among themselves.

What are the rules for a house abroad?

When it comes to taxing the rental value of foreign properties, most cantons keep it simple: instead of complicated individual calculations, they use a simple formula value.

In the Canton of Zurich, for example, the price for a holiday apartment is: 70 percent of the purchase price = tax value; of which 4.25 percent = rental value. You can claim for foreign currency losses (e.g. the euro against the Swiss franc) in your annual tax return.

No double taxation, but a higher tax rate

The tax values determined in this way do not generally lead to double taxation, however. You have to pay tax on properties only where they are located – in this case, abroad. This applies to all countries with which Switzerland has concluded a corresponding double taxation agreement and is the case for the vast majority of countries, especially those that are common holiday destinations for Swiss citizens.

However, the foreign property is not without any tax consequences in Switzerland. The value of the house and the income from it (rent or rental value) have a “rate-determining” effect in Switzerland. This means that income and assets are taxed in Switzerland at a rate that takes into account all domestic and foreign income and assets.

For example, a taxable income of 90,000 francs plus 10,000 francs rental value from a foreign holiday home is still taxed based on an income of 90,000 francs, but at a slightly higher tax rate that is calculated based on a taxable income of 100,000 francs.

What is an underuse deduction on the rental value?

If a living space is permanently empty (e.g. because children have moved out or a spouse has died), the Confederation and some cantons allow a special underuse deduction on the rental value.

In addition to the Confederation, BL, GR, NW, OW, SH, SZ, SG, UR, ZG and ZH allow a deduction of this kind. The underuse deduction is calculated differently depending on the canton. Most of the time, however, it is based on the calculation used for direct federal tax. In the case of single-family homes, the number of rooms plus two (for the kitchen, bathroom and other additional rooms) is used as the division factor to determine the deduction. For owner-occupied apartments, the rule is: number of rooms plus one.

Calculating the underuse deduction

Example for a house

The underuse deduction for a six-room house with two empty rooms and a rental value of 27,000 francs is calculated using the formula 27,000 times 6 (4 rooms in use plus 2 rooms) divided by 8 (6 existing rooms plus 2 rooms) equals 20,250 francs. The rental value is therefore reduced by 6,750 francs.

Example for an owner-occupied apartment

The underuse deduction for a five-room owner-occupied apartment with one empty room and a rental value of 18,000 francs is calculated using the formula 18,000 times 5 (4 rooms in use plus 1 room) divided by 6 (5 existing rooms plus 1 room) equals 15,000 francs. The rental value is therefore reduced by 3,000 francs.

But the requirements are narrowly defined. Many cantons require that the premises be completely cleared. Other cantons, such as ZH, are more generous in this regard: rooms that are no longer needed can at least be used as storage rooms. However, partial use – for example, as a guest room or ironing room – is not permitted in ZH.

There are no tax authorities that allow deductions for second homes. The same applies if the house or apartment was already oversized when you moved in.

Is it possible to reduce the rental value when renovating?

If you are renovating your house or apartment and need to stay somewhere else during this period, you can apply a corresponding tax deduction to the rental value of your property. For example, if the work takes a month, the rental value can be reduced by a twelfth.

However, the prerequisite is that the house or apartment is not actually inhabited during this time. TG, for example, requires that all furniture be removed from the home. SG even requires that costs for third-party rental (e.g. for overnight stays in a hotel) have been incurred during the renovation period. Free accommodation with friends or family does not entitle you to a tax deduction.

Other tax administrations are less restrictive: in AG, BL, BS, BE, GR and LU, for example, it is sufficient if the house or apartment was not actually habitable during the renovation period.

If the home is only partially habitable during the renovation phase, the rental value still applies in full in AG, BS, SG, TG and ZH. The tax administration in BE, on the other hand, accepts a proportional deduction in such cases.

Useful information: deduction in cases of hardship is being put to the test

The rental value can be a burden, especially for pensioners on a low income. For this reason, the cantons of GE, GR, LU, OW, SH, SG, VD and ZH include a hardship clause in their tax laws: if the rental value exceeds a certain proportion of taxable income (usually a third), the rental value is reduced. In LU and SG, however, the rental value may not fall below 60 percent of the market value due to the special deduction.

It is unclear whether these hardship regulations will continue to apply in the future. In September 2022, the Federal Court found that a new, analogous regulation in TI was not constitutional. But there is still a back door: without reaching a conclusive decision, the Federal Court found that a limitation of the special deduction to 60 percent of the market rent, as in LU and SG, was permissible at best.