Qualification of the use of a property as private or commercial

A flat deduction can be claimed for the maintenance of properties held as private assets. However, if the property is predominantly used commercially by third parties, only the actual maintenance costs can be deducted. The decision on when a property is predominantly used for business purposes is determined on a case-by-case basis.

For properties held as private assets, maintenance costs, the costs of repairing newly acquired properties, insurance premiums, and the costs of administration by third parties can be deducted. According to Art. 32 para. 4 DBG, a lump sum can be deducted instead of the actual costs and premiums. For properties that are predominantly used commercially by third parties, however, Art. 4 of the Property Ordinance prohibits such a lump sum deduction.

On September 11, 2018, the Federal Court ruled in case 2C_1020/2017 regarding the classification of the use of a property. A beneficiary who had rented a single-family house to a corporation, which in turn left it to one of its executive members and his family for residential purposes. In his tax declaration, the beneficiary claimed a flat deduction for maintenance costs, as he believed that the house was not rented for business use. The tax authorities disagreed and denied him this deduction, after which the taxpayer unsuccessfully filed an objection. The case also failed before the Administrative Court of the Canton of Zug, which is why it went to the Federal Court.

The taxpayer argued that there was no predominantly business use by third parties, since the house served private purposes for the executive member and his family without any commercial activity taking place in the house or garden. It was also not among the business purposes of the company listed in the commercial register to provide properties for residential purposes. It was an internal measure of personnel management, aiming to enhance the attractiveness of the employer to the employee living in the house. Moreover, it was result-neutral whether the company rented the house and provided it to the employee offsetting the rent, or whether it paid the employee a higher salary by the amount of the rent and left it to him to rent a house himself. The Federal Court disagreed. The rental agreement was concluded with the corporation, which made the use of the house appear commercial. The company had indeed left the house to an employee and his family for personal use, however, it was part of an executive member's salary for his professional activity. It is also to be assumed that a rental to third parties for business purposes is when the property owner does not have to bear maintenance costs, as they are regularly taken over by the tenant or lessee. In this case, the company covered numerous (usually landlord-borne) maintenance and ancillary costs, including maintenance costs for the house and heating, as well as the maintenance of the garden. Furthermore, the claimant was not the owner of the property, but only its beneficiary, which means by law he only bears the expenses for the ordinary maintenance and management of the property, not for renovations, repairs or restorations. For these reasons, it was not a private use, and therefore, the lump sum deduction was rightly not granted.

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