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Real estate gains tax: own work on buildings

Services provided by the owner himself for the benefit of his property, so-called personal services, are in principle deductible for real estate gains tax purposes in the same way as services provided by third parties. However, conditions regarding the price and proof of the personal services must be observed. In addition, brokerage commissions are treated differently from value-enhancing expenses.

What do own contributions have to do with property gains taxes?

Own work is understood to mean services in the construction of a building or extensive work on an existing building that the owner himself or a related person (also a company controlled by him) carries out on his property. Careful planning of the tax consequences is recommended in particular in the case of larger new construction projects in which comprehensive construction-typical services are provided by the owner of the property like a general or total contractor (if necessary, together with or for consortia. This is done with the intention of selling the property – often after dividing it into condominiums – at a profit after its construction.

In Basel-Stadt and Basel-Landschaft and in many other cantons such as Zurich and Bern, property sales by natural persons as well as legal entities are recorded with the separate property gains tax instead of income or profit tax. In view of the sometimes very high burden of real estate gains tax with a short period of ownership, there is an interest in such projects to have expenses taken into account in the real estate gains tax and not in the income or profit tax. The tax authorities therefore examine real estate projects very closely with regard to possible profit shifting.

Diverse own contributions – different tax treatment

There are often discussions between the project managers and the tax authorities as to which own contributions are to be treated as value-adding investment costs for property gains tax purposes and thus reduce the property gain.

While the third-party price for craftsmen’s work is relatively easy to determine, there are often discussions about the architect’s fee: In the practice of the Canton of Basel-Landschaft, for example, a limit of 15% of the fee-eligible construction sum is still considered reasonable; proof of higher costs is possible.

In contrast to these value-adding expenses, for which the seller’s own services are also eligible (subject to third-party comparison), brokerage commissions are only eligible if the broker can be regarded as a third party in relation to his client. The usual criteria for the recognition of brokerage commissions also apply here. The broker must be a third party in economic terms – not only in the legal sense. Construction consortia are sometimes treated inappropriately strictly in this respect by the tax authorities; the courts sometimes correct this by assessing the overall circumstances. The decisive factor is the equal treatment of all sellers and taxpayers. Costs for construction management and planning of larger real estate projects carried out by the owner are accepted as a deduction from real estate gains tax if they are proven to be indispensable and customary in the industry.

The proof of own work and its price is of utmost importance

The practice of the tax courts and other appellate authorities has identified a few important principles in this regard:

In principle, all own work performed can be included in the production costs; however, this can only be done at the price in line with the market (so-called third-party price). The burden of proof for this lies with the taxpayer in accordance with the general rules of proof in tax law – these are tax-reducing factors. The recognition of own contributions is subject to various conditions. The own contribution:

  • must have been declared as income or booked as revenue and thus be subject to income tax / profit tax and
  • must actually have been provided and
  • may not already be included in the construction settlement under another title and
  • represents a service that could not have been provided by any other builder . This includes the selection of the craftsmen, securing the financing, the payment transactions, the supervision of the construction.

Clean bookkeeping (separate property accounting) and good documentation (e.g. work reports) make it possible to prove who has performed which services. It is also crucial that these services are booked at a price in line with the market and invoiced promptly – not only after completion of the project. This creates trust already in the assessment procedure – the best basis for a favourable tax calculation.

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