What is the property capital gains tax?

Real estate capital gains tax is a special tax levied upon the sale of real estate. It applies to both natural and legal persons. Roughly speaking, this tax can be summarized as the difference between the purchase price and the selling price.

Logically, therefore, it is the person selling the property who must pay the tax to the tax authorities, usually no later than one month after the sale (except in exceptional cases where payment of the tax is deferred). But be careful: If they cannot pay this tax, the new owner is responsible and can be sued for payment.

This tax is not only due upon a sale, but affects all legal transactions that result in a transfer of ownership. It can therefore be applied to the exercise of a purchase right in favor of a third party, the sale of more than half of the participation rights in a real estate company, a private-law easement that grants a permanent and substantial encumbrance on a property, or a public-law restriction on ownership.

Real estate capital gains tax is easy to calculate but often underestimated. The exact formula for calculating the amount of this tax is as follows: (the selling price – the purchase price) x the cantonal tax rate / 100. Simply put, this taxable gain corresponds to the profit realized on the sale, i.e., the difference between the sales proceeds and the investment costs.

The sales proceeds correspond to the stated purchase price. Investment costs include: the original purchase price (including costs incurred at the time of purchase, such as notary fees, land registry fees, or real estate transfer tax), so-called capital-enhancing expenses (i.e., costs that contributed to the increase in the property’s value, such as construction and renovation costs), and brokerage fees. If the property in question is a business asset, the investment costs also include interest on real estate loans.

The tax rate applicable to real estate appreciation is progressive up to CHF 100,000. Above this amount of capital gain, a linear tax rate of 40% of the taxable profit applies. Please note that the “holding period,” i.e., the period the seller has owned the property, has a degressive impact on the capital gain tax rate (the longer a property has been held, the lower the tax rate). Finally, the tax also varies from canton to canton, with different regulations applying depending on the location of the property.

To determine the amount of capital gains tax, it is important to consider several criteria. One of the most crucial factors in calculating capital gains tax is the “holding period” of the property. This refers to how long the person owned their property before selling it. The longer this holding period, the lower the tax rate for the seller.

Generally, however, if the property is held for less than one year, the tax rate increases (e.g., 50% in the canton of Geneva, 30% in the canton of Vaud, and 22% in the canton of Fribourg). Between five and 20 years, the rate decreases (by 10% every two years in the canton of Geneva, and by 2% in the cantons of Vaud and Fribourg). Finally, capital gains from real estate of less than CHF 5,000 are simply not taxed.

In principle, payment of capital gains tax is due upon completion of the sale. However, it is sometimes possible to defer payment. This is particularly the case if the seller invests the entire sale proceeds in a “replacement property” located in Switzerland. Please note, however, that deferral is only possible if the seller rents the new residence (the replacement property).

In situations such as inheritance, transfer of ownership through anticipated inheritance, or gift, deferral of payment of capital gains tax is also possible. For example, if a parent leaves their property to one of their children as an inheritance or anticipated inheritance, and the child lives in the property, the tax payment is deferred. The tax only becomes due when the child, in turn, sells the property to a third party, unless they use the capital gain to purchase a replacement property.

In principle, the seller is responsible for paying the capital gains tax. But be careful: If the seller cannot pay, the tax authorities have legal recourse to collect the tax. The buyer can then have a legal privilege registered in the land register, making the buyer liable for the capital gains tax realized at the time of purchase. Therefore, if you plan to purchase real estate, it is important to do your research beforehand.

To do this, you should conduct several checks. First, you can contact the canton or municipality to find out whether taxes on capital gains are payable there. You can also ask the seller to deposit the amount of this tax with the tax office or a bank upon completion of the sale.

In some cases, the buying and selling parties also agree that the money will be paid into an account that can only be accessed after the tax has been paid. You can also pay this tax yourself and then deduct it from the sales price. In any case, make sure that you regulate these issues in writing in the purchase agreement.