What is an equalisation payment? Financial compensation for property

An equalisation payment is a sum of money paid to compensate for a difference in value when a property is allocated to one person rather than divided or sold. It arises in particular following a divorce, separation, inheritance or the withdrawal of a co-owner.

Equalisation payment definition: the exact role of the compensatory payment

An equalisation payment restores the economic balance between several people who hold rights in the same assets. As a home can rarely be divided without losing value, one owner or heir may retain it in return for paying the others financial compensation.

The Swiss Civil Code provides that, when co-ownership is dissolved, differences in value between the lots may be balanced by equalisation payments. In a divorce, the court may also allocate a jointly owned asset to the spouse who can demonstrate an overriding interest, provided that the other spouse is compensated. In inheritance matters, an asset that cannot be divided without a substantial loss in value may be allocated to one heir; if no agreement is reached, a sale may become necessary.

Everyday terminology nevertheless creates some confusion. The purchase of a share with an equalisation payment does not legally involve purchasing the equalisation payment itself. You take over another person’s share or property rights and pay them an equalisation payment to compensate for the rights they relinquish.

An equalisation payment must also be distinguished from three concepts:

• the sale price, which is the consideration paid for an ordinary purchase between a seller and a buyer;
• the repayment of a claim, for example when one co-owner has financed certain works alone;
• the assumption of mortgage debt, which concerns the relationship between the debtors and the lender.

These amounts may form part of the same transaction, but they are not governed by the same rules.

What is an equalisation payment in a divorce or separation?

Following a separation, an equalisation payment arises when one person retains more than their economic share of the home.

A rough calculation consists of subtracting the mortgage from the property value and then applying the ownership share of the person transferring their rights. This method is useful for an initial estimate, but it may be wrong where the parties made unequal contributions, only one partner made repayments, works were financed separately or claims arise under the matrimonial property regime.

For spouses subject to the participation in acquisitions regime, a contribution made without corresponding consideration towards the acquisition, improvement or preservation of an asset belonging to the other spouse may create a claim calculated on the asset’s current value. Where there is an increase in value, the claim may therefore exceed the nominal amount invested; where there is a decrease in value, the Civil Code generally guarantees at least the amount invested.

Consequently, co-ownership registered at 50% each does not guarantee that each spouse will receive exactly 50% of the final net value.

The position is different for unmarried couples. There is no comparable liquidation of a matrimonial property regime. The ownership shares entered in the land register, the co-ownership agreement, acknowledgements of debt and proof of financing therefore become particularly important. Paying a greater proportion of the monthly instalments does not automatically change the ownership share.

Before negotiating the equalisation payment, gather at least:

• the purchase deed and land register extract;
• the mortgage agreement and an up-to-date statement of the debt;
• evidence of the initial equity contributions;
• proof of amortisation payments and works financed individually;
• any marriage contracts, cohabitation agreements or acknowledgements of debt;
• a recent independent property valuation.

The most costly mistake is to agree an “acceptable” equalisation payment first and only then ask the bank whether the transaction can be financed. The order should be reversed: establish each party’s rights, calculate the full cost, verify affordability and then finalise the agreement.

Inheritance equalisation payment: calculate it across the entire estate

Following a death, the heirs generally hold the estate assets in common until the estate is divided. An inheritance equalisation payment may be due when an heir takes over a property whose net value exceeds their share of the estate as a whole.

The calculation must therefore not be limited to the house. Cash, securities, other properties, debts, legacies, reportable lifetime advances and estate expenses must also be included. Subject to certain conditions, the surviving spouse may also be entitled to have the family home allocated to them against their share.

Consider the following example. An estate comprises:

• a house valued at CHF 900’000.–;
• a mortgage of CHF 300’000.–;
• cash of CHF 180’000.–;
• three heirs, each entitled to one third.

The house has a net value of CHF 600’000.–. The net estate amounts to CHF 780’000.–, meaning that each heir must receive CHF 260’000.–.

If heir A takes over the house and the mortgage, they receive a net value of CHF 600’000.–. Heirs B and C may each receive CHF 90’000.– from the cash, but they are still short of CHF 170’000.– each. Heir A must therefore pay a total equalisation payment of CHF 340’000.–.

This calculation shows why simply dividing the house by three would have been incorrect. It also shows that the acquiring heir must be able to bear the CHF 300’000.– debt, the CHF 340’000.– equalisation payment and the transfer costs at the same time.

Where the heirs do not agree on the value, an independent valuation can reduce the dispute. It should specify the valuation date, the condition of the property and the effect of any usufruct or right of residence.

How do you calculate a property equalisation payment without overlooking internal claims?

In a straightforward case, the indicative formula is:

Equalisation payment = (property value − assumed property debt) × transferred share

Example: a home is worth CHF 1’100’000.–, the outstanding mortgage is CHF 620’000.– and the two co-owners each hold 50%. The net value is CHF 480’000.–. The transferred share is therefore worth CHF 240’000.–, which is the indicative equalisation payment.

This result is valid only if the ownership shares correspond to the parties’ economic rights and no claim, tax or specific allocation of costs alters it.

A reliable calculation follows six steps.

1. Determine the relevant value

The property fair value is the price likely to be achieved under normal market conditions. It must not be confused with the tax value, the purchase price paid several years earlier or the emotional value attached to the home.

A valuation date must be set. In a changing market, a valuation obtained at the beginning of a separation may no longer be relevant when the notarial deed is signed.

2. Identify the debt actually assumed

The debt deducted must correspond to the mortgage actually assumed, taking account of any interest, amortisation or contractual costs.

3. Apply the legal ownership shares

Co-ownership in a 60/40 ratio is not calculated in the same way as equal co-ownership. In collective ownership, particularly within an estate, rights arise from the community and the division rather than from a freely disposable share registered for each member.

4. Settle internal claims

Contributions, loans, works and extraordinary amortisation payments must be examined separately because their legal basis may affect the division and taxation.

5. Allocate the transaction costs

The parties must decide who bears the notarial, land register, valuation, advisory and mortgage amendment costs, as well as any taxes. An equalisation payment of CHF 240’000.– does not mean that the acquiring party needs only CHF 240’000.– in cash.

6. Review the result after financing

The financing structure must enable the acquiring party to afford the home over the long term. Even an accurately calculated equalisation payment may be financially unaffordable.

Equalisation payment and mortgage financing: what the bank actually assesses

Financing the purchase of a share with an equalisation payment through a mortgage is not a simple administrative amendment. When the composition of the debtors, the loan amount or the security changes, the bank will generally reassess the application.

Banking guidelines require lenders to assess creditworthiness, financial capacity and security before granting a loan. For an owner-occupied home, the analysis must be based on sustainable income and costs. Each lender sets its own imputed mortgage rate and maximum cost-to-income ratio in its internal rules. The lending value is also determined prudently, independently of expectations of future price increases.

The bank therefore does not merely check that the property value covers the debt. In particular, it examines:

• the sustainable income of the person who remains the owner;
• their other loans, maintenance payments or commitments;
• interest calculated using a prudent imputed rate;
• the required amortisation;
• maintenance expenses and other property costs;
• the lending value determined by the bank;
• the amount of equity that remains tied up in the property.

A separation can make previously affordable financing unviable even where no payment has ever been late. Two incomes previously financed the home; one income must now cover the mortgage, maintenance and sometimes additional borrowing used to pay the equalisation payment.

The agreement between the parties does not automatically release the departing co-debtor from liability. An assumption of debt requires the creditor’s consent. Until the bank accepts the substitution, the departing person may remain liable to it.

The financing requirement should be calculated by separating:

Continuing mortgage debt + equalisation payment due + costs − available cash

In the previous example, the acquiring party retains debt of CHF 620’000.– and must pay CHF 240’000.–. Their total economic commitment is CHF 860’000.– before costs, even if the additional mortgage financing requested from the bank covers only part of this amount.

Several solutions may be combined: equity, a mortgage increase, refinancing or deferred payment. The latter creates a private credit risk and requires a precise agreement on due dates, security and the consequences of late payment.

A preliminary budget assessment allows the project to be tested using the bank’s property value rather than only the value negotiated between the parties. It avoids signing an agreement that the lender subsequently refuses to finance.

Use our mortgage calculator to simulate your property financing.

Tax, notarial and other costs: the equalisation payment is not the only cost basis

Property taxation is largely a cantonal matter. A transfer involving an equalisation payment may raise questions concerning transfer tax, real estate gains tax, inheritance or gift tax, land register fees and notarial costs. The rules and exemptions vary according to the canton in which the property is located.

Two oversimplifications should be avoided in particular.

First, a tax deferral is not a permanent exemption. For certain transfers connected with an inheritance, a gift or the matrimonial property regime, real estate gains tax may be deferred. The latent tax burden then follows the property and may reappear on a subsequent sale. The acquiring party should take this into account when comparing the requested equalisation payment with the value actually received.

Second, the cash equalisation payment is not necessarily the only consideration for tax purposes. Depending on cantonal law, the assumption of debt, the discharge of an obligation or the market value of the transferred share may affect the tax base. Some cantons expressly treat the assumption of debt as possible consideration and calculate transfer tax on the value of the property rights transferred.

Potential costs to include in the budget are:

• the property valuation;
• the drafting and execution of the deed;
• land register fees;
• transfer taxes;
• real estate gains tax or security for it;
• bank charges and loan amendment costs;
• a penalty or compensation for the early termination of a mortgage agreement;
• the legal or tax advisory fees required for the division.

The notary executes the transfer but does not replace an affordability assessment or tax planning. The legal, tax and banking calculations must be coordinated before signing.

Mistakes to avoid before setting the financial compensation

The first mistake is to use the tax value as the market price, even though it may serve a different administrative purpose.

The second is to deduct the entire mortgage without checking who will assume it and whether the bank accepts the change. A debt cannot be transferred unilaterally to the lender’s detriment.

The third is to confuse the equalisation payment with the initial equity contributions or works. These items may constitute separate claims and alter the division before the equalisation payment is even calculated.

The fourth is to ignore the latent tax liability associated with a deferred real estate gain.

The fifth is to sign a final amount without making it conditional on financing. A poorly drafted clause may require the acquiring party to pay even though the bank refuses to release the other debtor or increase the mortgage.

The sixth is to focus on the current monthly payment, although the lender assesses long-term affordability using its own assumptions.

Thorough preparation involves obtaining three documents before the final agreement: an asset statement, a cantonal tax simulation and a mortgage assessment. Comparing them makes it possible to determine not only the appropriate equalisation payment but also the amount that can actually be financed.

Preparing a financeable purchase of a share with an equalisation payment

A sound project begins with a documented property value and a complete inventory of debts and claims. It continues with a financing assessment based solely on the future owner’s income, followed by tax and notarial validation of the transfer.

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To prepare for a meeting with a mortgage expert, gather proof of income, your tax return, pension statements, the mortgage agreement, an amortisation statement, the land register extract, the property valuation and the draft agreement. These documents help identify quickly whether the difficulty lies in the equalisation payment, the value used by the bank, the loan-to-value ratio or affordability.

The objective is not merely to retain the home. It is to retain it without creating a disproportionate burden or unintentionally leaving the former co-owner liable for the debt. A budget assessment followed by a meeting with a mortgage specialist enables you to compare your private agreement with the lender’s actual requirements and adjust the structure before the final deed.

Disclaimer: the applicable rules depend in particular on the canton, matrimonial property regime, form of ownership, mortgage agreement and inheritance situation. This content provides general information and does not replace legal, tax, notarial or banking advice based on your individual case.