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Profit made with sale of house – no capital gain tax

When you sell your house and you make a profit, the profit is not taxed, as we do not know capital gain tax. This is only different when the house was owned by a company, then we do know capital gain tax. What is the situation with respect to the mortgage deduction when you sell your house with a profit and you purchase another one?

In the Netherlands you can deduct the mortgage interest you pay for the house that is your main residence. In the past houses were sold with a profit and another house was purchased, again fully financed with a mortgage. The profit was spend on luxury items such as cars or boats. Basically the Dutch tax office financed these luxury items, hence since a decade this is no longer the case.

If you sell your house and you make a profit, the profit is not taxed. If you purchase another house, you have to invest the profit in the new home. If that is not done, the deduction of the mortgage interest is limited with the profit made during the previous sale.

Financing companies are aware of this rule and take already into account the expected profit to be made with the sale of the house while issuing their mortgage offer. You can either loan less or invest the money in the new home. Investment is for instance a new kitchen, bathroom, roof or other investments that are connected to the property. New curtains, sofa or closets do not qualify as such.

Not only is this system more fair another result, most likely unintended, is that you cannot have your kitchen, bathroom or roof done by a cheap organization that does not provide invoices. As you need to show the invoice to the bank in order to get the money for the investments in the property.

How does that work? If you indicate to the bank that you are going to invest the profit made with the sale of the previous home, the bank does provide a full mortgage of the new home, but keeps in depot the amount equal to the profit made with the sale. Only if you provide the bank with receipts and invoices, the bank is paying out the depot.

What if you have finished making the investments in the new property and you still have balance in

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