Debating Pros and Cons of Rental Property Valuation
In a thought-provoking example, two individuals, Müller and Egli, have found themselves at the centre of a taxation debate in Switzerland. Both Müller and Egli have the same income and wealth, but their financial situations and the subsequent tax implications are far from equal.
Müller, a tenant, pays 30,000 francs in rent each year, while Egli, the owner of his house, enjoys the luxury of no capital costs for living as his property is paid off. This difference in living expenses leads to a significant disparity in their tax burdens.
Egli's million-franc fortune is invested in property, while Müller's million is invested in securities. The securities investments of Müller yield 30,000 francs annually, a sum that is taxable. However, Egli's "imputed income" from living rent-free is not taxed, creating a perceived unfairness in the system.
The term "imputed rent" refers to the amount that owners must pay taxes on when they live in their own property and do not pay rent. Experts view rent-free living as a so-called natural income, but many people find it unfair that taxes are due on this imputed income.
The example demonstrates the difference in tax treatment between rental income and imputed income from living rent-free. According to the principle of taxation based on economic performance, imputed income should be taxed. However, the current system in Switzerland does not tax Egli's imputed income, while Müller's profit from her investments is taxed.
This case study involving investments in securities and in property has sparked a heated debate, with many calling for reforms to ensure fairness and consistency in taxation. The issue is far from resolved, but the comparison between Müller and Egli serves as a powerful illustration of the perceived unfairness in the current tax system.
