Qualification of real estate as private or business assets

For properties included in business assets, the taxpayer can deduct actual costs and premiums. If properties are allocated to private assets, a flat-rate deduction can also be claimed, which is often higher. Which type of assets a property is allocated to depends on various criteria.

In April 2017, the Federal Court had to decide a case in which the tax classification of properties became an issue. A.A. and B.A. owned various properties during the tax period of 2008. Two of these properties – both self-financed and rented out long-term - were classified by the tax authorities of the Canton of Schwyz as business assets, which made the (in this case higher) flat-rate deduction impossible. The taxpayers filed objections against this assessment and, after being denied by the Tax Commission and the Administrative Court of the Canton of Schwyz, appealed to the Federal Court. A.A. worked primarily as an architect until his retirement and part-time as a real estate dealer for a few years. While working as an architect, the taxpayer acquired the necessary expertise concerning real estate and thus learned of the buying opportunity for the said properties. Three other properties owned by the taxpayer were created in a building consortium and were therefore undisputedly part of the business assets. These indicators sufficed for the lower courts to allocate the properties to the business assets, which made a flat-rate deduction according to Art. 32 Sec. 4 DBG impossible. This can only be done with private assets, or the taxpayer may decide whether to use the actual maintenance costs or the flat deduction.

To qualify as business assets, assets must according to Art. 18 Sec. 2 Sentence 3 DBG entirely or predominantly serve self-employment. Here, it would involve real estate trading, which is present when the taxable person systematically undertakes purchases and sales of properties with the intention of making a profit. Indicators include the systematic nature of the approach, the frequency of real estate transactions, the close connection of a transaction with the professional activity of the taxable person, the use of special expertise, the short ownership duration, the use of significant external funds for financing, the reinvestment of the profits obtained in similar assets, or the realization of profits within the framework of a partnership. On the other hand, if real estate with residential or commercial buildings is developed using private funds in order to generate income from their leasing, it usually represents private asset management.

In the present case, the Administrative Court ignored the long-term lease agreements of the properties as well as the fact that the taxpayer is involved in D. AG, which specializes in holding properties. In the view of the Federal Court, holding and long-term leasing of the properties since their acquisition strongly argue against the intention of a quick and profitable resale. Furthermore, both properties were financed with own funds.

Although the taxpayer was qualified as a real estate dealer, not all his properties may be allocated to business assets. Each property must be examined individually for allocation. For the reasons mentioned, the Federal Court assigned the properties to the private assets and referred the complaint back to the Administrative Court of Schwyz for re-assessment.

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