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Usufruct or right of residence for real estate with focus on taxes

Quelle: AMATIN AG 2021

The gratuitous transfer of a property within the family circle or among close relatives can result in a large tax burden for the acquirer. With timely planning, this can be significantly reduced by granting a usufruct or a right of abode.

Gift tax in case of gratuitous transfer of a property

The transfer of a property during one’s lifetime within the family or to close relatives must be examined for tax purposes if it cannot be made from parents to descendants or between spouses or registered partners and is therefore free of gift tax in most cantons. If the property is to be transferred to siblings, their descendants (nephews or nieces), other relatives or non-relatives, then sometimes substantial gift taxes are payable if there is no consideration or if the acquisition price is significantly below the market value of the property (so-called mixed gift). The valuation methods of the tax authorities vary, but often result in a higher value and thus a higher tax than expected by the parties.

Granting of usufruct or right of residence

With timely planning of a cross-generational transfer, the will of elderly persons to be able to live in their own four walls for as long as possible can be used for tax purposes. It is possible to transfer ownership of the property during one’s lifetime and still allow the previous owner to continue living in the property as before. This is done by granting a usufruct or a right of residence. Both are so-called rights in rem, which are entered in the land register and thus offer absolute legal protection.

The usufruct gives the beneficiary great economic freedom, except that he can no longer dispose of the property. In addition to full personal use of the property, there is also the right to sublet and thus to generate liquid income. In the event of a move-out due to old age, the claim to the income from the house continues until the end of life. The right of residence, on the other hand, can only be exercised personally; however, it does at least make it possible to live in the property. The circumstances in the specific case decide which entitlement is more suitable and who bears the ongoing costs and investments, which also has an influence on the current income and wealth tax.

Reduction of the tax burden in the case of gratuitous acquisition

Both the usufruct and the right of residence legally represent a restriction of ownership and thus economically represent a burden on the value of the real estate. This is where the tax effect of the transfer comes into play: The gift is reduced by the value of this encumbrance. For this purpose, both the usufruct and the residential right are calculated in the form of a cash value based on the statistically expected lifetime of the beneficiary, applying the appropriate interest rate as well as the capitalization factor. This cash value is deducted from the market value of the property or from the gratuitous part of the transfer. In this way, the gift tax can be substantially reduced. Logically, the younger the beneficiary, the greater the tax advantage. If the owner is the heir of the beneficiary, then in the event of the beneficiary’s premature death, the lapse of the obligation may be taxed.

If a transfer of real estate – usually to the younger generation – is foreseeable in principle, it is worthwhile from a tax point of view to plan this in good time, taking into account the possibilities.

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