Property sales and taxes

• Private Clients
• Real Estate
• SME
• Tax Law

Private capital gains are generally tax-free in Switzerland. This does not apply to private property sales, which are subject to cantonal property gains tax. If gains from the sale of real estate result from gainful employment, they are also taxable for direct federal tax purposes and are also subject to social security contributions.

The private capital gain is tax free

All recurring and non-recurring income is subject to income tax. However, capital gains from the sale of private assets are exempt from taxation. The tax exemption of private capital gains is often undisputed: The occasional sale of movable assets such as shares, works of art or a car from private assets does not trigger income tax, even if a profit results due to the lower purchase price at the time. Only if the sales activity is carried out commercially does this have consequences for income tax.

Real estate is different

The situation is different when selling a property: all cantons also tax gains that are not based on a commercial sale. This is done with property gains tax, which is levied separately from income tax. The amount of tax depends not only on the sales profit, but also in particular on how long the property was owned by the seller.

Direct federal tax, on the other hand, does not recognise a separate property gains tax. In the case of private individuals, the distinction between private asset management and self-employment therefore determines whether a property constitutes private or business assets and whether the gain on sale is tax-free or commercial and therefore taxable. Taxable commercial property trading exists if purchases and sales of properties are carried out systematically and with the intention of making a profit. What is required is an activity which, in its entirety, is aimed at making a profit. There is no commercial activity if only one’s own assets are managed, which also includes occasional reallocations through sales.

Criteria for commercial property trading

The criteria for the business approach are as follows:

• Active, value-enhancing activities through parcelling, development, advertising, etc.
• Acquisition with the intention of reselling the property as quickly as possible at a profit.
• Utilisation of the market trend.
• Frequency of property transactions / short period of ownership
• Use of special expertise.
• Use of considerable external funds for financing (80% and more).
• Realisation of profits within the framework of a partnership.

The decisive factor is the totality of the circumstances in the respective case. Based on case law, assessment practice is strict in the case of profit realisation: tax-free private capital gains are handled restrictively, while the concept of self-employment is to be understood broadly according to the Federal Supreme Court. The individual indications must therefore not be considered in isolation, otherwise the principle of tax-free capital gains would be abandoned.

Further points

The qualification of properties as business assets not only means that realised gains are taxable, but also that losses are deductible. Depreciation is also possible. However, the tax authorities are reluctant to recognise properties as business assets as long as no sales are made.

Another consequence of qualifying a property sale as commercial is of great importance: in addition to direct federal tax and property gains tax, social security contributions (AHV/IV/EO) must also be paid on the profit from the sale.

It is clear that sufficient attention must be paid to the tax treatment of a gain on sale in a property transaction. Timely planning is essential.