Workshop by Petra Caminada and Branko Balaban on the occasion of the ISIS) seminar on November 12, 2024 entitled "Tax issues relating to private investment in 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)Anna Müller (AM), born in 1940, gifted her three children—Thomas Müller (TM), Jolanda Müller (JM), and Lothar Müller (LM)—the single-family home she lived in in Meggen, as well as a fully rented apartment building in the city of Lucerne, in the spring of 2005. For both properties, she had a life-long usufruct granted to her (→ mixed gift, entry in the land register). The three siblings acquired the mixed gift as a simple partnership in joint ownership. The mixed gift was made pursuant to a public deed, with credit applied to the future inheritance.
Upon AM’s death in the fall of 2020, the usufruct right to the two properties lapsed, so that TM, JM, and LM thereafter declared the income from renting the properties as well as the tax value of the properties on a pro-rata basis in their tax returns. All siblings are subject to limited tax liability in the Canton of Lucerne solely on the basis of their real estate holdings. Two of them have their tax residence in the Canton of Zurich, and one person in the Canton of Aargau.
After lengthy discussions, the siblings decide to sell the single-family home in Meggen on the open market, if possible, by the end of 2024. In addition, TM wishes to purchase his siblings’ shares in the multi-family home in the city of Lucerne as of January 1, 2025, and hold it as sole owner in the future.
In connection with the acquisition of the shares from JM and LM, the siblings agree in the purchase agreement that if TM resells the multi-family home at a profit on the open market within 5 years of the acquisition, he must assign 1/3 of the net profit to each of JM and LM.
Hans Weber (HW) is 65 years old and has his tax residence in the canton of Zug (Cham). He is a widower and has three adult children: Thomas Weber (TW), Karin Weber (KW), and Sonja Weber (SW), who reside in the canton of Zurich.
HW owns a building plot in Cham. According to information provided by the Cham Tax Office over the phone, the market value of the building plot is CHF 30,000,000. For tax purposes, the plot is classified as part of HW’s private assets. The acquisition cost of the building plot is CHF 10,000,000. A relevant holding period of at least 60 years applies because the land has been owned by the Weber family for decades.
A legally binding building permit has been issued for the construction of 4 apartment buildings with 40 units and an underground parking garage on the aforementioned building lot. The construction costs for the project are estimated at CHF 36,000,000 and can be fully financed through a bank loan (fixed-rate mortgage at 1% interest). All apartments will be rented to third parties. Annual rental income is projected at CHF 1,800,000, with maintenance and administrative costs of CHF 240,000.
HW wants to have it examined whether, from a tax perspective, he should carry out the construction project himself and rent out the apartments in his own name, or through a real estate corporation (AG) that he has founded and controls. Upon HW’s death, his children TW, KS, and SW are to inherit the shares of the real estate corporation in equal parts. The tax burdens are as follows:
Hans Weber (HW) is 65 years old and has his tax residence in the Canton of Zurich. He is widowed and has three adult children, namely Thomas Weber (TW), Karin Weber (KW), and Sonja Weber (SW), who are also residents of the Canton of Zurich.
HW, TW, KW, and SW establish Real Estate AG, headquartered in the Canton of Zurich. The share capital of Real Estate AG amounts to CHF 100,000 and is divided into 100 registered shares with a par value of CHF 1,000 each. HW, TW, KW, and SW each subscribe to 25 registered shares of Real Estate AG (25% stake each).
HW owns a property in the canton of Zurich (private assets). The property is unencumbered. The market value of the property is CHF 6,000,000 and the acquisition cost is CHF 3,500,000. HW sells the property to Real Estate AG at the acquisition cost of CHF 3,500,000. As part of the assessment procedure for real estate gains tax, the tax office sets the relevant proceeds at CHF 6,000,000 rather than CHF 3,500,000. In support of its decision, the tax office states that, pursuant to § 220(1) StG ZH, the proceeds are defined as the purchase price plus all other payments made by the purchaser. Although the purchase price in this case amounts to CHF 3,500,000, the sale of the property to Immobilien AG at the reduced price of CHF 3,500,000 constituted a hidden capital contribution of CHF 2,500,000, which must be classified as an additional consideration within the meaning of § 220(1) StG ZH and added to the purchase price of CHF 3,500,000.
Jürgen and Maria Kraft (JK and MK) live in a single-family home (solely owned by JK) in the city of Bern. They had the house extensively renovated during the current tax year and increased the existing (previously low) mortgage for this purpose. MK also owns, together with her sister, an apartment building in the city of Zurich (an inherited investment property, each owning a half-share), which is fully rented out. The apartment building is encumbered by a mortgage, which the sisters each bear half of. About 15 years ago, JK received a share in an SCI from his parents, which owns a property near Nice. The property has been in the family’s possession for decades and serves as their vacation home (not rented out to third parties).
JK and MK live with their children in France and are subject to unlimited tax liability there. JK inherited a single-family home in the canton of Bern from his parents, which he rents out. He recently had the house extensively renovated and increased the existing mortgage for this purpose. MK owns an apartment building in the city of Zurich together with her sister, which is fully rented out. The apartment building is encumbered by a mortgage, which the sisters each bear half of.
Same facts as in the base case: JK and MK live in a single-family home in the Canton of Bern; MK owns an apartment building in the city of Zurich together with her sister; and JK owns a vacation property in France.
In addition, MK, a Swiss and U.S. citizen, received a 34% stake in Golf Club LLC (Limited Liability Company) in the U.S. as a gift from her mother, who lives in the U.S., in October 2023; Golf Club LLC, in turn, owns a large property with a golf course and clubhouse. In the U.S., Golf Club LLC is treated as a transparent “partnership,” and a K-1 form is filed annually in the U.S. for the LLC’s partners.
In connection with the gift, the property was appraised by a local expert. The fair market value at the time of the gift in October 2023 was USD 7.5 million. Profits are generated solely through the sale of new golf club memberships.
Questions
Same facts as in the base case: JK and MK live in a single-family home in the canton of Bern; MK owns an apartment building in the city of Zurich together with her sister; and JK owns a vacation property in France.
In addition, JK has inherited a share in a German real estate fund from his parents. The real estate fund has the legal form of a GmbH & Co. KG. The general partner is a limited liability investment company established specifically for this purpose. Investors, such as JK, who hold a property certificate, do not act in their own name externally but have entrusted the investment company (limited liability company) to do so (trust limited partner). The real estate fund is limited to holding a single property. This property is a fully leased office building in a prime location in Frankfurt am Main. The real estate fund’s profits, which consist of rental income, are distributed annually to the investors. The main tenant of the office building has a time-limited right of first refusal. The investment ends upon the expiration of this right of first refusal (no later than the end of May 2027).
