Saving Taxes with Interest on Debt: Mortgages and Loans Overview

Many taxpayers in Switzerland finance their homes with a mortgage or take out loans for other purchases. The good news: debt interest can be deducted from taxes – but only under certain conditions.

In this article, you will learn which debt interest is deductible, how the limitation works, and what differences exist between mortgages and consumer loans.

Debt Interest Deduction: Basic Principle

What is Debt Interest?

Debt interest is the cost incurred for borrowed capital. This includes:

• Mortgage interest for real estate
• Credit interest (e.g., bank loans, personal loans)
• Interest on credit cards or current account overdrafts
• Construction loan interest (from the start of property use)

Tax Effect

Debt interest can be deducted from taxable income, thus reducing the tax burden.

Limitation of Debt Interest Deduction

Federal Rule

The debt interest deduction is limited:

• Only debt interest up to the amount of taxable gross investment income (e.g., interest, dividends, rental income, imputed rental value) before deducting acquisition costs plus CHF 50,000 is deductible.
• Important: The allowance of CHF 50,000 applies per household – even for married couples together, not per person.

Example

• Gross investment income: CHF 10,000
• Debt interest: CHF 80,000
• Deductible: CHF 60,000 (10,000 + 50,000)
• Not deductible: CHF 20,000

Special Case: Partial Taxation of Dividends

Income from private equity holdings subject to partial taxation (e.g., dividends from Swiss corporations) is only included at 70% in the calculation of investment income.

Mortgage Interest

Significance for Homeowners

Mortgage interest often represents the largest portion of debt interest and is deductible. Together with the imputed rental value, it forms the basis for taxation of home ownership.

Tax Optimization

• High mortgage: More debt interest, larger deductions, but also higher interest costs
• Low mortgage: Fewer deductions, but lower financial burden

Many homeowners deliberately maintain a certain level of debt to optimally utilize the tax deduction.

Indirect Amortization

Indirect amortization through pillar 3a can be particularly attractive from a tax perspective, as the mortgage remains high (more interest deduction) while simultaneously building retirement capital with tax deductions.

Consumer Loans and Other Debts

Consumer Loans

Interest on consumer loans (e.g., car purchase, personal loan) is also deductible – however, the limitations also apply here.

Credit Cards and Current Accounts

• Credit card interest is deductible if it has actually been incurred
• Current account overdraft interest is also deductible

Leasing

• Leasing rates do not qualify as debt interest but as rental costs – they are not deductible
• Leasing is treated for tax purposes as rent and not as credit

Practical Examples

Example 1: Home with Mortgage

A married couple pays CHF 18,000 in mortgage interest per year. Since they have rental income and dividends of CHF 5,000, they can deduct the full debt interest (5,000 + 50,000 = 55,000).

Example 2: Consumer Loan

An employee has a personal loan with interest of CHF 3,500. This debt interest is deductible, provided the limit is not exceeded.

Example 3: Excessive Debts

An investor pays CHF 120,000 in debt interest but has only CHF 20,000 in investment income. The maximum deductible amount is CHF 70,000 (20,000 + 50,000).

Common Mistakes and Tips

Common Mistakes

• Declaring leasing rates as debt interest
• Claiming debt interest deduction without appropriate proof (e.g., bank certificates, loan agreements)
• Not observing the deduction limit
• Double-counting the CHF 50,000 allowance (for married couples)

Tips

• For all debt interest: Keep proof (mortgage certificates, bank certificates, loan agreements, interest statements)
• Balance debt level with tax and financial burden
• Consider the tax effect of debt interest when making investments
• Distinguish between actual debt interest and non-deductible costs (e.g., leasing)
• Calculate gross investment income correctly (before deducting acquisition costs)
• Complete the debt register fully with all required information (creditor, debt amount, interest rate)

Conclusion

Debt interest offers an interesting opportunity to reduce the tax burden in Switzerland – particularly through mortgages on residential property. However, the deduction is limited and depends on the gross investment income earned.

The allowance of CHF 50,000 plus investment income is sufficient for most households to deduct the entire interest expense. It is important that all debt interest is properly documented and the distinction between deductible debt interest and non-deductible costs (such as leasing) is observed.

Those who plan their financing wisely can save taxes, but should always keep long-term financial sustainability in mind.