Workshop by Robert Desax on the occasion of the ISIS) seminar on November 12, 2024 entitled "Tax challenges for commercial real estate"
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)Mr. and Mrs. A live in the canton of ZH. Mr. A owns a painting and plastering business. Over a period of 30 years, he and his wife have acquired six properties. In 2011, Mr. and Mrs. A purchased a property in the municipality of X for CHF 750,000. At the time, they financed the purchase partly through a mortgage (CHF 500,000). On the other hand, they pledged their life insurance policy as collateral (total CHF 250,000). They hold this property (as well as the others) as an investment. They wish to preserve their assets in this manner and intend for them to be inherited by their daughters in this form one day. Half of Mr. and Mrs. A’s assets are invested in real estate.
At the end of 2023, Pension Fund B contacts Mr. and Mrs. A. Pension Fund B owns the neighboring parcel in the same zoning district in X. It is planning a large-scale development and is therefore very interested in Mr. and Mrs. A’s property (utility connections and transfer of building rights). Pension Fund B therefore makes Mr. and Mrs. A an unexpectedly attractive offer. They decide to sell and dispose of the property to Pension Fund B for CHF 2,600,000. They retain their other properties.
The ZH Tax Office assesses a taxable income of CHF 1.8 million from the sale for direct federal tax purposes, after deducting an AHV provision and the purchase and sale costs.
01 Federal Supreme Court judgment 2C_702/2021 of April 21, 2022; see also Federal Supreme Court judgment 2C_643/2021 of October 13, 2022, para. 8.
The spouses A.A. and B.A. reside in the canton of ZH and own additional properties in various cantons (one owner-occupied apartment in ZH; the others are investment properties). A works in a construction-related industry.
In 2012, A.A. and B.A. purchased a property (multi-family house) in the canton of SO for CHF 3.5 million. The mortgage amounts to CHF 2.6 million (75%). During the holding period starting in 2012, A.A. and B.A. manage the property intensively themselves (various on-site visits and office work, meetings with the building manager, dispute resolution among tenants, carrying out and/or coordinating repairs, apartment handovers, inspection tasks, etc.). However, the workload eventually becomes too much for them, and they delegate property management to a third party. Over the years, their management costs are, for the most part, not tax-deductible.
In 2017, they sell the property in SO for CHF 4.3 million. The sale is apparently, among other things, the result of significant personal efforts by A.B. (extensive [including tax-related] preliminary investigations, preparation of sales documentation, soliciting listing offers, conducting viewings). This is the first time that A.A. and B.A. have ever sold a property.
The ZH Tax Office assesses A.A. and B.A. for direct federal tax and, after deducting an AHV provision and the purchase and sale costs, on a taxable income of CHF 500,000 from the sale.
02 Federal Supreme Court Decision 2C_643/2021 of October 13, 2022.
A owns a total of eight properties as sole owner. A holds three additional properties, acquired in 2006, 2010, and 2011, jointly with B as co-owners (in a simple partnership). In 2006, A purchased a property for CHF 2.1 million, which he contributed to a general partnership with B in 2008. B is a long-time friend and business partner. B brings the necessary real estate expertise to the partnership.
When acquiring his properties, A consistently follows the same clear financing strategy: He specifically seeks out and purchases properties whose market value exceeds the purchase price. This difference enables A to demonstrate to the banks the “equity” required for the granting of mortgages. From the bank’s perspective, these “hidden reserves” thus serve as equity. In effect, A does not need his own liquid funds for the purchases.
In 2019, A and B have a falling out and wish to go their separate ways. They sell the jointly held properties. The property in question, acquired in 2006, is sold for CHF 7.4 million.
The Zurich Tax Office classifies A and B as commercial real estate dealers and subjects the capital gain to direct federal tax. A, however, argues, among other things, that contrary to the tax office’s view, he was not 100% debt-financed. Market values are decisive for this assessment of the debt-to-equity ratio. Given the nature of the properties in question, it was also clear that the market value could be realized relatively easily, which shows that his risk was not actually that great. The general partnership was not established for the purpose of real estate trading, but merely for the holding and management of real estate. Furthermore, he never intended to sell the property, but was merely forced to do so due to the unfortunate dispute with his business partner.
03 Regarding A: Judgment of the Federal Supreme Court 9C_632/2023 of January 22, 2024; regarding B: Judgment of the Federal Supreme Court 9C_613/2023 of January 22, 2024.
A (75 years old) is a retired baker and a widower. His four children are adults. All parties involved reside in the canton of Zurich. A still holds the Zurich property of his former bakery, which has since closed, as part of his business assets. This property is rented out. A therefore also pays AHV on the rental income, despite his age.04
A wishes to organize his estate. The property is to be transferred to his four children in the long term. Each child is to receive an equal share.
A is considering the following alternative options:
04 See the case in the Federal Supreme Court decision 9C_897/2013 of June 27, 2014.
05 See the case in the Federal Supreme Court judgment 9C_335/2023 of October 26, 2023.
