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Old 09.08.2013, 10:29
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How are home improvements treated in capital gains tax

Quick question.

We know that if you buy a place and sell it quickly again for a profit eg in the first year or two, that you are penalised here in Switzerland quite heavily in terms of a capital gains tax, which according to what I know, is meant to discourage quick profiteering.

But what if you say buy a place for a million, spend 500k on improvements, and sell it for 1.5m? Are you able to treat all the improvements as deductions or how does this work?
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Old 09.08.2013, 10:37
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Re: How are home improvements treated in capital gains tax

gains are normally selling price less costs. if you made capital improvements, then these should normally be part of the costs, no?
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Old 09.08.2013, 10:44
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Re: How are home improvements treated in capital gains tax

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gains are normally selling price less costs. if you made capital improvements, then these should normally be part of the costs, no?
Although that would be expected, I am wondering if people here have direct experience of that.
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Old 09.08.2013, 10:57
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Re: How are home improvements treated in capital gains tax

If I understand it correctly - and this is a huge caveat as I have not yet sold the house, and experience so far has been that if I ask the question of three tax officials I will get six different answers...

We gutted and renovated our house 10 years ago. We could deduct in that tax year improvements that were direct replacements of existing features, but not those that were additions - like a new bathroom - or 'luxury enhancements' - like an upgrade in the type of flooring. Theoretically those things we could not deduct in the tax year the costs were incurred can go against capital gains when we sell.

But... we had the use of those improvements over the last 10 years. Here is where my confusion lies. One tax office says that we can can only deduct an amortized amount, another says the full amount. Still working on finding a definitive answer to that one.
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Old 09.08.2013, 10:57
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Re: How are home improvements treated in capital gains tax

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Although that would be expected, I am wondering if people here have direct experience of that.
Family here bought an old house, and have been improving it slowly - using their own capital, and doing the work (mainly) themselves.

When time came for increasing bank loan to cover more expensive costs - new heating, water pipes, electricity cables - the bank told them their improvements increased the value of the house, and that even though their own work was "free" it should be costed out and included. That should they ever sell, these costs would be deducted from any profit made, and therefore not taxable as sheer profit.

Does that make sense? It does to me. Although some folk seem to not want the bank to increase the value of their homes, due to the eigenmietwert it incurs.
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Old 09.08.2013, 11:01
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Re: How are home improvements treated in capital gains tax

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I

But... we had the use of those improvements over the last 10 years. Here is where my confusion lies. One tax office says that we can can only deduct an amortized amount, another says the full amount. Still working on finding a definitive answer to that one.
I suspect 1 tax office was talking about income tax & the other one about capital gains tax. There are several ways if accounting as opinions are involved
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Old 09.08.2013, 11:26
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Re: How are home improvements treated in capital gains tax

The price we paid for our house was the price the former owners had paid, +15K that they'd paid for refurbishment. As they'd had the house less than a year, they would have had to pay 100% tax on any profit. So it seems refurbishment costs are deducted from the capital gains. At least in Baselland!

However, when we bought our house, the stamp duty (five figures) was deferred. If we sold the house within 5 years and didn't use the money to buy another house in the same canton, then we'd be liable for the stamp duty.

We were very happy when the bank increased their valuation of our house. It meant all our mortgage was in the first tranche/lower interest.
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Old 09.08.2013, 12:53
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Re: How are home improvements treated in capital gains tax

As already mentioned:

1) Anything that is done to maintain the value of the property is deductible on an annual basis. In the tax return you can either tick the 20% of rental value OR submit receipts. Maintaining value can include:
- boiler servicing
- replacing "expected white goods"
- regular painting and decorating
- gardener
- replacement of plants
- installation of a new bathroom.
- new heating system

The list goes on and on.

2) Anything that is done to "fundamentally increase the value of the property" should be deductible from the capital gains. Things that fall into this category are usually big:
- adding a room
- adding a bathroom
- building a garage

You get the idea. Anyway there are a few caveats. If you replace a bathroom in a 500,000chf - and it costs 50,000chf - expect the tax authorities to question this as maintenance. If however you do this on a 5,000,000chf house - they are unlikely to.
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Old 09.08.2013, 13:12
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Re: How are home improvements treated in capital gains tax

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.
- new heating system
But does the item replaced have to be non-functioning in order for a deduction to be allowed?

For instance, I am required to replace the burner on our furnace due to emission levels. I don't want to put a new burner into a 25+ year old furnace, because murphy's law the rest of the system will then break down a year or two later, so I plan on replacing the whole thing.

At present, the furnace functions perfectly, though.

Can I deduct the cost of the whole new furnace, or only the cost of the burner, as changing it is mandated?

(I ask because when we renovated the kitchen the cantonal authorities only allowed deductions for the broken appliances - not the cost of replacing the old appliances that were still functioning.)

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- replacement of plants
Holey moley, I've missed out on thousands in deductions!

(Although I'm sure the tax authorities could argue that my lack of green thumb makes for an unwarranted replacement rate. )
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Old 09.08.2013, 13:16
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Re: How are home improvements treated in capital gains tax

don't forget that stuff you claim annually cannot be claimed once again when you sell for a profit. So you must think about for how long you will own the property.

We'll be doing 300k of renovations shortly to our place but will keep things separated from the annual tax return as any selling price will be +500k on what we paid for the property as the people selling it had no idea of the real market value of the property.
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Old 09.08.2013, 13:33
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Re: How are home improvements treated in capital gains tax

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don't forget that stuff you claim annually cannot be claimed once again when you sell for a profit. So you must think about for how long you will own the property.

We'll be doing 300k of renovations shortly to our place but will keep things separated from the annual tax return as any selling price will be +500k on what we paid for the property as the people selling it had no idea of the real market value of the property.
Perhaps you paid the real value! Time will tell
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Old 09.08.2013, 13:37
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Re: How are home improvements treated in capital gains tax

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Perhaps you paid the real value! Time will tell
perhaps. Give the knowledge I have of this and neighbouring properties and what they've sold for in the recent past, I'd say I got a bargain.

Unrenovated it would be a slow sale. That's something I'm very aware of.
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Old 09.08.2013, 13:53
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Re: How are home improvements treated in capital gains tax

Some further answers on this (all based on what I have managed to gleam from tax experts where I used to work).

- Replacement of existing services can be claimed as maintenance if they are performed within an acceptable cycle. For example, if you replaced your boiler 10 years ago - but because of increased fuel prices you opt to switch to a ground pump - that would be a capital improvement, as it is deemed smaller maintenance costs could be made for it to complete its full life. My rough rule of thumb is 25 years for the major stuff.

- When you renovate a property split out what it is "improvement" and what is "maintenance". Get separate invoices for each - and ensure the invoices for maintenance are split across years (whenever possible) up to the maximum of your tax bill.

If you are doing big renovations most contractors will work with you on the invoicing structure to assist you spreading the taxable benefit across multiple years. EG For a 150,000chf job - 50k invoiced right before the end of Year 1 (when work hasn't even started), 50k in Year 2 - and 50k in Year 3 (6 months after the work has finished)!!
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Old 11.08.2013, 22:26
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Re: How are home improvements treated in capital gains tax

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Quick question.

We know that if you buy a place and sell it quickly again for a profit eg in the first year or two, that you are penalised here in Switzerland
Dont wish to hijack this thread but I was under the impression that foreigners buying property are restricted on selling within a certain number of years ???
We bought a flat in Valais and were told that restrictions apply on reselling it ? not sure if its 5 or 10 years ? Maybe its only second homes ?
Would appreciate info if anyone knows
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