What does owning a home in the Netherlands mean for your taxes?
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Driven by renewed confidence in the economy and the current low-interest rates, people are increasingly buying property in the Netherlands. Maybe you are also considering purchasing property in the Netherlands, either to stay here for a while or as an investment. But what does this mean for your tax position? And what will happen if you return to your country of origin and/or if you start renting out the property?
Mortgage interest deduction
The Dutch tax system includes a mortgage interest deduction for a property that is your primary residence (your home). A taxable value for your home is included in your income tax return. This taxable value is a percentage of the so-called WOZ-value of your home.
The WOZ-value is a value determined by the Dutch authorities and is also used as the basis for - for example - some of your municipality taxes. The percentage used to determine the taxable value of your home varies from 0 to 2.35 percent dependent on the level of the WOZ-value of your home. The greater the value of the home, the higher the percentage of the taxable value you will need to pay.
For example, if a home has a WOZ-value of 450,000 euros, the applicable percentage is 0.75 percent, leading to a taxable value of 3,375 euros. The paid mortgage interest can be deducted from this taxable value. In this example, if this person paid 12,000 euros in mortgage interest, this leads to a deduction of 8,625 euros (€ 3,375 - € 12,000) from the taxable income on their income tax return.
Please note that the deduction only applies to taxable income and not to payable taxes. Currently, the actual benefit you will receive is based on the highest tax rate applicable to you.
As of January 1, 2020, the rate used to calculate mortgage interest deduction will be decreased by 3 percent each year. Within four years, the tax rate will be 37 percent. So, even if you fall under the highest tax rate of (then) 49 percent, the deduction will be granted at a tax rate of only 37 percent.
If the property is not, or no longer, your primary residence, you are not entitled to the mortgage interest deduction. Of course, exceptions apply, for example, if you only leave the residence temporarily for work or if you are yet to live in the home due to the fact that it is a newly constructed building (or still under construction) and still needs some work done for it to become habitable.
Tip: If you are not yet living in the home or temporarily not living in the home, we advise you to check beforehand if this affects your mortgage interest deduction.
Deductible expenses regarding the purchase (or refinancing) of a home
In addition to the paid mortgage interest, there are also costs that you will incur when obtaining a mortgage loan. Such costs may be deductible:
- The closing fee / bank commission charged by the bank (“afsluitprovisie”)
- Notary costs for registering the mortgage (not the purchase of the property itself) including VAT
- Valuation costs to obtain the mortgage
- Other costs related to the mortgage
Request for a preliminary assessment
The mortgage interest deduction can lead to a substantial refund when filing your income tax return. You may, however, prefer to get the refund on a monthly basis instead of once a year. In that case, you can request a preliminary refund from the tax authorities. This preliminary refund is an estimate based on the information known to the tax authorities.
If you received a refund during these months which was higher or lower than the actual refund you should have received, it will be adjusted in the filing of your yearly income tax return.
Tip: Inform the tax authorities if your tax position changes in a certain year and adjust the estimate, for example, if you leave the Netherlands or sell the home. This will prevent a significant and sometimes unexpected payment when you file Dutch income tax return for that year.
Leaving the Netherlands
If you decide to leave the Netherlands but still keep your property, it will affect your tax position. The tax treaty between the Netherlands and your new state of residence will govern which state has the right to levy taxes regarding this property.
Most tax treaties will stipulate that the Netherlands, as the state where the property is situated, may levy taxes. As your home in the Netherlands is no longer your primary residence (unless an exception applies), you will no longer be entitled to claim a mortgage interest deduction. Instead, the net value of the property (value minus any mortgage loan) will be taxed as an investment in “box 3” of your tax return. The effective tax rate regarding the value of the property minus mortgage is currently between 0.87 and 1.62 percent.
If you decide to rent out the property, the actual rent received will be ignored for tax purposes. If legal rental protection is applicable, a depreciation of the taxable value in box 3 might apply.
The mortgage interest deduction is a substantial tax benefit for homeowners in the Netherlands and one may also consider the deductibility of additional costs related to obtaining the mortgage.
However, it is to be expected that the benefit of this deduction will decrease in the near future and might even be abolished. If you do not yet live in the home or are temporarily living elsewhere, we advise seeking information beforehand about how this will affect your mortgage interest deduction.
When leaving the Netherlands all together, do not forget that you might still have to file a Dutch income tax return as the Netherlands is allowed to levy taxes against the property.
For more information about taxes in the Netherlands and how BDO and its services can help you, call +31 20 36 34 251 or fill in the contact form below.