Using two houses as residence and mortgage deduction implies that you have a special situation. Either you purchased one house and are soon to sell the other, or are you…?
Using two houses as residence and mortgage deduction – regular situation
The answer of the tax office is simple. Either you chose which house is your main residence or you have no mortgage deduction for any of the house. The exception to this rule is when you purchase one house, and you are redecorating this new house, while you are still residing in your ‘old’ house. Then you can deduct the mortgage interest for both houses. This period can last for maximum two years.
The two years might sound a bit long for decorating, but initially this period was not for decorating but for trying to get your old house sold. Currently the house is sold within a week, but times have been different.
Using two houses as residence and mortgage deduction – fraudulent situation
Are both houses used as residence, or are you renting out one and you want to benefit from the mortgage deduction for this house as well. We see it happen, and therefore the tax office checks if the house is actually put on Funda for sale. If you cannot proof you put the house for sale, then you have issues, fraudulent issues. You do not want that.
Using two houses as residence and mortgage deduction – ‘clever’ situation
And then we have of course the ‘clever’ couple that states that he is residing in the one house and she is residing in the other house. So both houses are used as the main residence, hence the mortgage deduction cannot be denied. In fact one of the houses is rented out either permanently or via AirBNB.
Here the main rule applies, either no mortgage deduction for both houses, or accept that you are no longer tax partners. That might be a simple choice, but it is not so much a choice, it is more based on facts and circumstances. So if you state for the sake of double deduction you are no longer tax partners, but due to the renting out of one of the house it is clear that one is not a main residence of the couple, then there are serious issues.
However, if you indeed have a couple that he is living in the one house and she is actually living in the other house, this is no longer a couple for tax purposes. You might be happy for the mortgage deduction, but the mortgage deduction is only for the part of the house that you actually own. That implies if both couples own both houses (each 50%) then the mortgage deduction per individual tax payer is maxed at 50%, as you cannot deduct the mortgage interest for the part of the house you do not own.
Using two houses as residence and mortgage deduction – genuine situation
A court case took place about two apartments being used as one residence. You might see that happen on your staircase that one or two floors are merged. Maybe already for years so the apartment was also purchased as such, but never the less, two houses being merged is a problem.
One problem is the one you have with the local county that does not accept a house being taken from the housing market by merging it. So an official merging request is nearly always denied.
The other problem is the tax problem. You can only deduct the mortgage interest of the one house, not two. Not even if you can proof that the house is internally connected. That the living room is in the one house and the bedrooms in the other.
The problem is in the registration of the houses. Each house has its own registration and only one house you can claim to be your main residence. In this case the tax office won the case and one house the mortgage deduction applicable to that house the interest can be deducted. The other house is in so called Box 3 where the WOZ minus the debt taken out is taxed at about 1.2% tax.
The argument of the tax payer was that they have always filed their income tax return in such a manner that the mortgage of both houses was deducted. Based on the tax office accepting the tax filings, the tax payer was under the impression that the tax office also accepted the situation.
This argument was lost as well. Efficiency does not overrule this requirement. Moreover, in my opinion the tax returns have never been completed correctly. A correctly filed income tax return would imply that the WOZ value of both houses are reported, and as that is not possible other than in the case of buy and sell, the tax returns could not have been filed correctly.
We file a substantial number of income tax returns. Basic questions about the taxation of the house are included in our fixed fee for filing the income tax return. We also process preliminary refund request. If you want to learn more about buying a house and tax, visit one of our free entrance expat housing seminars.