A CHALET FOR ALL PURPOSES: skiing, investing and saving on taxes

The financial and fiscal aspects of owning a second home in switzerland

The allure of owning a chalet was the topic of a recent article in this magazine, thus the time has

come to delve into the financial and fiscal implications for Swiss residents. Let’s begin with the bad news. The savings held in second and third pillar accounts, which are a popular and tax-friendly way to finance one’s main residence in Switzerland, cannot be used for second homes. This is particularly inconvenient given that the down payments required by mortgage providers for a second home are typically even higher than those needed for a first residence. As a consequence, prospective chalet buyers typically need to stump up 30% of the purchase price in cash, without accounting for transaction costs such as notary fees, which vary widely from one

canton to another.

With this anticlimax out of the way, it’s worth pointing out that once a chalet has been purchased, it can turn in handy not just for your weekends and holidays, but for fiscal purposes, too. First of all, if you have taken out a mortgage on your chalet, you have a debt that you can offset against your wealth, thereby reducing or eliminating the Swiss wealth tax, similarly to what happens with mortgages on a first residence.

Secondly, mortgage interest payments can be deducted from income tax, together with most maintenance costs. Given that in Switzerland no fewer than 26 Cantons manage to cram themselves into what is a fairly small country, be aware that your chalet is likely to be based in a different Canton than your fiscal domicile, even if it’s nearby. Therefore, you will either have to submit a tax return in two Cantons, or hand in a copy of the tax return of your main place of residence to the Canton of your second home.

Thus, when you rent your chalet out, the rental income will be taxed based on the rates of the local Canton. If you live in one of the larger cities, these tax rates will often be lower than those of your primary income.

What is never tax-deductible, regardless of the Canton, is the service charge applied by the management company of apartment buildings. This cost is often unexpectedly high and is the least transparent of all fees related to home ownership. Basic cleaning costs of common parts such as hallways, the trimming of hedges and plumbing fees are rather uncontroversial, but somehow service charges have the funny habit of appearing to be excessively inflated with regards to what you get out of them.

One “good” reason for service charges to be high is the inclusion of a renovation fund to put money aside for future large-scale maintenance work such as roof repairs. However, if you buy into a newly-built place, it is rather unfair to have to pay from day one for repairs from day oe that are over 20 years off, especially since you may not even own that place anymore by then. In that case, you would be subsidising future owners who will be the ones to benefit from a new roof that you paid for. Some management companies have caught up to this, waiving renovation fund charges for the first ten years, while others haven’t.

Thus, taking a good look into what is and isn’t included in the service charge and valuing this in relation to the age of the building is an easily overlooked but highly important aspect to take into account before buying an apartment in a chalet.

Even more influential in setting the price of your service charge is the presence or absence of a pool. It is easy to underestimate how expensive it is to maintain a shared pool. In the case of a pool in a second residence, it is particularly important to run a quick cost-benefit analysis, comparing how often you are likely to use it with the annual cost of servicing it. How often you are likely to use it will in turn depend in no small way on how large it is in relation to how many flats it is shared with. Keep in mind that in the winter months, usage will be peaking when people come back from the slopes in the late afternoon and early evening, and that children tend to be less bothered by crowded pools than adults.

Lastly, bear in mind that not all mountain villages are created equal: the choice of where your chalet is located will have a substantial effect on how well it holds its value over time. Indeed, it is obvious that some mountain resorts in Switzerland are doing much better at preserving property values over the years than others. As a rule of thumb, those villages that have had the vision to reinvent themselves as an all-year-long holiday proposition over the last few decades are doing quite well, while others that have neglected to upgrade their infrastructure and failed to offer anything else to do than skiing and hiking tend to be in decline.

It is not primarily a matter of size and altitude, although of course locations that are too small or too low are a bit challenged. It is mainly a matter of whether the local communal authority is prepared to invest in their village to keep up with the times. My personal formula for assessing whether it is worth investing in a chalet, apart from the considerations pertaining to the individual property discussed above, is to look at what the local council is doing: are they good at maintaining skilifts, do they promote some cultural life in the village, do they organise events all year round, do they attract worthy shops and restaurants? In short, do they match the effort they ask you to do when you buy a property by putting making an effort of their own in putting their house in order? If the answer is yes, your investment is likely to pay off. If they don’t, you have been warned: you don’t want to end up on the wrong side of history.

ENRICO BORGER - Financial Writer & Investment Specialist