The imputed rental value is better than its reputation – homeowners and tenants are treated equally

Mrs. Meier and Mrs. Müller earn the same amount. They also have the same net worth, one million francs each.

Meier has invested this money in bonds, stocks, and real estate funds. She generates annual capital gains (excluding any capital gains) of CHF 30,000. She lives in a rented apartment and pays CHF 30,000 per year in rent. Müller, on the other hand, lives in her own apartment, which is valued at CHF 1 million.

Müller has invested her entire fortune in the apartment; she has no debts. For simplicity, let's assume that the imputed rental value of this apartment is exactly 30,000 francs per year.

Roughly speaking, Meier and Müller are equally well off financially. Under the current system based on imputed rental value, they are also essentially treated equally for tax purposes. In addition to her earned income, Meier must tax her investment income of CHF 30,000 per year as income, and she cannot deduct her rent.

And Müller has to pay taxes on the imputed rental value in addition to her earned income. She has no rental costs. If she also has costs for the maintenance of her apartment (value-preserving expenses), she is financially worse off than Meier, but she can deduct these costs from her income.

The current system, with its combination of imputed rental value taxation and deduction for property maintenance, essentially treats homeowners and tenants equally: This corresponds to the basic principle of taxation according to economic capacity.

The reform passed by Parliament contains three key points: the abolition of imputed rental value taxation, the abolition of the property maintenance tax deduction, and a significant reduction in the debt interest deduction. Under the new system, Müller and Meier would only be treated equally for tax purposes if the property maintenance costs exactly corresponded to the imputed rental value.

In practice, however, maintenance costs are usually much lower. One indicator is the standard flat rate for maintenance costs of 20 percent of the imputed rental value. This means that the new system would clearly favor homeowner Müller over tenant Meier in terms of tax treatment. You can want that, but then you should say so openly.

It would be conceivable to restore equal treatment in the new system by introducing a nationwide rent deduction. However, this would contradict another golden tax rule: the broadest possible tax base, the lowest possible rates. If income taxes are not to be reduced, the tax authorities would have to raise tax rates if they introduced a general rent deduction – which would exacerbate the economic distortions caused by income taxes.

Meanwhile, like Müller, Mrs. Huber owns an apartment worth one million francs. Huber, too, has invested her entire fortune in the apartment. However, this is only 300,000 francs; the remaining 700,000 francs are financed through mortgages. She pays annual interest of 14,000 francs on these loans. She can deduct this interest from her taxes under the current system.

In the new system, Huber, on the other hand, pays the same amount of income tax as Müller, even though she is significantly worse off financially due to the interest on her debt. This means that homeowners without debt fare better in the new system than homeowners with debt. This is also possible – if one prioritizes reducing the incentive to take on debt over taxation based on economic performance. However, reducing the incentive to take on debt would be possible by significantly reducing the interest deduction in the current system.

The abolition of the maintenance deduction means that owners of apartments that require high maintenance (typically older apartments) will be worse off in terms of taxes than those with lower maintenance costs.

The current system is also not flawless from a tax perspective. The current interest deduction leads to distortions. Furthermore, the imputed rental value is generally 30 to 40 percent below the market rental value, which already favors homeowners over renters.

Tax optimizers can also increase their mortgage and invest the money in stocks; in doing so, they only have to tax the dividends as income, while capital gains remain untaxed. This unevenness, however, is not due to the imputed rental value tax, but rather to the absence of capital gains tax. Homeowners, on the other hand, are subject to property gains tax in the cantons and municipalities on profits from sales.

Critics describe imputed rental value as "fictitious" income. From an economic perspective, it is income in kind. This also reflects the position of the Federal Supreme Court. Just as an employee who receives free rental accommodation from an employer must tax this rental value as income, homeowners tax the imputed rental value. The main difference: The former is earned income, the latter is investment income.

But why is there a tax on the imputed rental value of real estate, but not on yachts, cars, paintings or other assets?

This is partly due to administrative economy: Only with real estate does the matter really flow, and only there can values ​​be estimated with any degree of reliability and reasonable effort. In addition, everyone needs housing – the population is essentially divided into two groups: homeowners and renters. Equal tax treatment of these two groups is therefore important.

This comparison is irrelevant for yachts or paintings. Tax experts also argue that certain goods, such as cars, are consumables that depreciate with increasing use: thus, their use is offset by a corresponding loss in value.

Internationally, very few countries like Switzerland tax imputed rental value. This taxation is more popular in tax theory and among economists than in politics. From the perspective of equal taxation of income from residential property and other assets, the non-taxation of imputed rental value is distorting, wrote the economists of the OECD in their 2015 country report on Switzerland. The authors even recommended that Switzerland bring imputed rental value closer to market rental values. The OECD also identified potential for higher real estate taxation in its 2022 country report .

A "long list of studies" considers taxing imputed rental value to be optimal, according to a 2010 Federal Reserve working paper . The widely cited British "Mirrlees Review" of 2011 on the optimal tax system also advocated taxing income or consumption from home ownership. A 2013 International Monetary Fund working paper criticized the market distortion caused by the absence of imputed rental value taxation in many countries.

A core message from some economists: The de facto subsidization of home ownership leads to excessive prices. The imputed rental value should be taxed, the EU Commission staff also wrote in analyses from 2012 and 2015. A 2016 literature review by six European researchers also indicated widespread skepticism among economists and tax experts about privileges for homeowners.

In Switzerland, several expert reports since the 1990s have affirmed the tax logic of imputed rental value and the associated deductions. A 2016 report from the Federal Administration advocated expanding imputed rental value taxation (closer to market values) from a perspective of economic efficiency—but added that this had little political chance.

The current imputed rental value taxation is “highly consistent in terms of tax system, economically sensible and corresponds to taxation according to economic performance,” wrote tax experts and emeritus professors Peter Locher and Peter Gurtner in a specialist article this spring.

But this doesn't go down well with many of those affected. To some, it seems absurd to tax income they don't directly see. In any case, considerations about tax logic and economic distortions have the character of Sunday school sermons: If they're acceptable, they're occasionally quoted in political practice; otherwise, they're ignored. At the ballot box, other factors are likely to be more important to many citizens—above all, their own wallets and political preferences.