Property gain tax: Misuse of the replacement property

The property gains tax is deferred when a replacement property is purchased in Switzerland and the taxpayer takes up residence there. However, it was unclear whether a canton may subsequently demand the deferred tax if the replacement property is misused after the residence has been established. The Federal Court has now ruled on such a case.

When a property is sold at a profit, the property gains tax becomes due. However, it can be deferred if a replacement property is purchased, which is also located in Switzerland. You can read more about it in this blog post. Until now, it was unclear what happens if the replacement property is misused after the tax deferral. In the ruling 2C_306/2016, the Federal Court has now addressed this and answered the question of whether a canton may demand the deferred property gains tax if the replacement property is misused after the residence has been established (e.g., as a vacation home) and therefore no longer represents the taxpayer's residence. A taxpayer sold his apartment in the canton of Zurich at a profit on February 21, 2011, and moved to the canton of Graubünden, where he purchased a property. This was classified as a replacement property, which is why the property gains tax was deferred. The residence in Graubünden was established on February 15, 2011. On December 31, 2012, the taxpayer then moved his residence for professional reasons to Great Britain and subsequently used the Graubünden property as a vacation home, which is why the Zurich tax authorities contacted him and retroactively demanded the deferred property gains tax due to the misuse of the property. They argued that, due to his move, the apartment was now only a vacation home and that the 22 months during which the taxpayer had his residence there did not correspond to the required permanent use. They based their claim on a statement in a circular from the Zurich Department of Finance, which stipulates that in the case of permanent misuse of inter-canton replacement properties within five years from the conveyance of the original property, the municipality of the move can revert its decision regarding the tax deferral and assess the deferred property gains tax in the post-assessment procedure. The taxpayer filed an objection and reached the Federal Court.

In Lausanne, he was vindicated. The Federal Court ruled that the canton of Zurich had wrongly demanded the deferred tax. The requirement for the deferral of the tax is that the taxpayer permanently and exclusively uses the replacement property by taking up residence there. The court reminded that the concept of permanently and exclusively self-used residential property is governed by federal law and leaves the cantons no leeway, which is why the differing Zurich regulation is not permissible. Permanent and exclusively self-used residential ownership exists when the taxpayer has established residence in the replacement property and at that time had the (externally recognizable) intention of remaining permanently in the replacement property and relocating his center of life there. It does not matter when considering future circumstances (such as for professional reasons) that could lead to moving away again. If someone has stayed at a place for at least a year, it can be assumed that they intended to remain permanently, which is the case here.

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