Tax valuation of buildings

Why would a YES vote on the LEFI be beneficial for all Geneva taxpayers?

Introduction

In the canton of Geneva, the fiscal value (hereinafter «VF») of real estate generally corresponds to the acquisition price, less an annual allowance of 4 %, up to a maximum of 40 %. However, under federal law, real estate must be valued at its market value. As Geneva's practice does not comply with federal law, the Geneva Council of State was required to prepare a bill to this effect (September 2020). The bill was submitted to the Grand Council but failed to find a parliamentary majority willing to adopt it. However, a counter-proposal drawn up by a number of MPs was submitted to and accepted by the Grand Council on 4 November. Unhappy with the adopted law, the Geneva left immediately launched a referendum. Now that the necessary number of signatures has been collected, the people of Geneva will be called upon to vote on the LEFI on 18 June.

The LEFI

Broadly speaking, the bill put to the vote provides for the following changes to the taxation of assets:

• Current tax estimates are increased by 12 % (art.1 al.1) ;
• From the second year onwards, tax estimates will be indexed by a maximum of 1 % per year in line with changes in the Geneva consumer price index; ;
• However, the 12 % increase would not be applied in the following cases (art. 4):
• FV estimated by an expert at market value after 31 December of the 11th year preceding the entry into force of the LEFI
• FV based on the cost of construction at 31 December of the 11th year preceding the entry into force of the LEFI
• VF of property transferred after 31 December of the 11th year preceding the entry into force of the law
• Linear reduction in the wealth tax scale of 15 % ;
• Reduction in supplementary property tax from 0.1 % to 0.02 %; ;
• Increase in tax on property profits and gains from 0 % to 2 % for property held for more than 25 years.

Tax consequences of the LEFI, if accepted

For homeowners :

The taxation of homeowners will clearly be affected in the event of a «yes» vote on 18 June. But should they be prepared for a pleasant or unpleasant surprise? To answer this question, we looked at a number of cases.

On the basis of the tax simulations carried out, we found that LEFI could have a positive impact on the taxation of property owners. Although the tax value of property would increase by 12 %, the 15 % reduction in wealth tax rates would neutralise the increase in the tax base (taxable wealth). We have also noted that the reduction in the supplementary property tax (IIC), from 0.1 % to 0.02 %, will make a significant contribution to lowering the tax bill.

Finally, our simulations have shown that the greater the taxable wealth and the more it is made up of real estate, the greater the tax reduction. This is mainly due to the progressive nature of the wealth tax rate and the significant reduction in the IIC.

For non-owners :

If the LEFI is approved, homeowners will not be the only taxpayers to see their tax bill fall! Non-owner taxpayers who are liable for wealth tax would also benefit from a tax cut thanks to the 15 % reduction in the wealth tax scale.

Conclusion: why vote yes?

As mentioned in the introduction, the canton of Geneva needs to reform its property tax system with regard to the valuation of real estate, in order to comply with federal law. The bill submitted to the people of Geneva has the merit of being simple and balanced. It is understandable that the 12 % increase in taxable value provided for in the bill may worry some property owners. However, they can rest assured that the LEFI should ultimately soften their tax bill, as well as that of other non-owner taxpayers!

Furthermore, for those who might be reluctant to abolish the 0 % rate in the event of the sale of a property after 25 years of ownership, we would point out that the introduction of a minimum rate of 2 % would still be the most advantageous in comparison with the rest of the cantons in French-speaking Switzerland3.

Finally, it should be remembered that the canton of Geneva is the Swiss canton that taxes its taxpayers' wealth most heavily, with a maximum tax rate of 1 % (the canton of Basel is 2nd in the ranking with a rate of around 0.8 %). Thanks to the LEFI, the maximum rate of wealth tax in Geneva would fall to around 0.9 %, which would narrow the gap with the 2nd-ranked canton and soften its wealth tax practice somewhat.

3 Fribourg: 16 % / Vaud: 7 % / Valais: 5.76 %