In the event of the sale of its property bearing a fixed-term mortgage debt, without the assumption of the mortgage contract under the same conditions by the buyer of the property, it is common for banks to levy compensation for early termination of the contract. Such a situation could generate different tax implications in the past depending on the canton where the property is located, in particular with regard to the deduction of the compensation.
To enable you to realize the consequences in this matter, harmonized since the end of 2019 through a decision of the Federal Court, here is our tax advice relating to the real estate transactions concerned.
1. Tax regime until 2019
Until the end of 2019, the cantons were relatively free in qualifying the “penalty” due to banks for early termination of the contract. The cantonal tax authorities could therefore (i) either consider this cost as a non-deductible expense, (ii) or consider that it was an expense, deductible for real estate capital gain tax purposes, (iii) or accept the deduction of the charge from the seller’s taxable income as a passive interest.
2. Tax regime since 2019
Since the decision of 16.12.2019 issued by the Federal Tribunal (2C_1009 / 2019), the principles in this area are now as follows:
- In the event of early termination, together with the conclusion of a new contract with the same financing institution, and without the property being sold, the penalty is deductible from taxable income as passive interest.
- Upon early termination, together with the conclusion of a new contract with another financing institution, the charge is not deductible from income, as it is qualified as a compensation. The same applies in principle to early repayment of the mortgage without assuming a new debt.
- Finally, when the termination occurs in conjunction with the sale of the property, the penalty is considered an expense, and therefore deductible for real estate capital gain tax purposes.
3. Recommendation of the tax specialist
Knowing the significant costs that indemnities for early termination of the fixed-term mortgage contract can indirectly generate, whether in the context of the sale of his property or during the conclusion of a new contract, it is strongly recommended for the seller to approach his tax specialist to seek prior tax advice relating to the real estate transactions in question.