The current housing market is such that it is very likely you make a profit on the sale of your house, but is that profit taxed? Yes and no.
No capital gain tax
In the Netherlands we do not know capital gain tax for private individuals. That implies a profit made on the sale of your property is not taxed. The tax treaty the Netherlands has with other countries in the world state that if the property is situated in the Netherlands, only the Netherlands can tax the profits. The fact that the Netherlands does not tax the profit does not make it possible for the country where you are living in while the house was being sold (if you migrated before the sale), can tax that profit. Even though the other country is very keen to do so.
The profit is therefore not taxed, but at the start of the article I stated ‘Yes and no’. Can the profit be taxed. Not exactly as such, but in a U turn that limits your deductions, which is more or less the same.
You need to invest the profit in your newly purchased home
The moment you sell your house and you make a profit, the Dutch are known to purchase a car or a boat, then they purchase a new house and fully mortgage that and deduct 100% of the new mortgage interest from the income, while enjoying the car and or boat.
That possibility stopped in 2012 when the crisis hit the housing market and measures needed to be taken.
The moment you sell your house for a profit, this profit needs to be reinvested in the newly purchased home, if you purchase a home within a five year period from the moment you sold your previous home. If you fail to do so, then the interest related to the new mortgage will never be tax deductible anymore for the part that can be allocated to the value of the profit.
So assume you made a EUR 100.000 profit with the sale of your house. You purchase a new home for EUR 350.000. The tax office expects you to pay with your own money (from the profit) EUR 100.000, hence the max loan you can take out is EUR 250.000.
If you decide not to do so, then the loan for the newly purchased home is EUR 350.000 let us assume at 2% interest, then EUR 350.000 minus EUR 100.000 is EUR 250.000 the amount over which you can deduct the mortgage interest. That is EUR 250.000 times 2% being EUR 5.000, but you paid in total EUR 350.000 times 2% is EUR 7.000 interest, hence EUR 2.000 of that amount will never be tax deductible anymore.
What is profit in this matter?
Profit you would assume is the value you sell the house for minus the value you purchase the house for. But that is not what the tax office thinks is a profit. The tax office states that profit is the difference between the value you sell the house for minus the mortgage debt at the time of the sale. This amount is then adjusted with non-deductible costs such as real estate agent costs and some marginal costs.
What if you purchased a new home and you sell your present home at a later stage?
The moment you purchase a new home, you cannot know what or if you make a profit with the sale of your old home.
How can you then allocate the profit of the sale to the new house?
For this situation you simply need to make the calculation later, the moment you actually sell, and then either repay a part of the mortgage with the profit made, or invest the amount in the new house (new bathroom, kitchen, roof etc).
What if you never sell the old home but you rent it out?
The moment you move your household from the ‘old’ home to the new house you basically need to have a valuator valuate the old house. That valuation report is than the sale price. That price minus the debt you had on the house the moment you moved out is the profit. Due to the fact you did not sell the house, you therefore have no possibility to use the profit to make a down payment on the new house, you automatically arrive in the situation where you cannot fully deduct the mortgage interest.
Should you make the effort of the valuator making a valuation report? Yes you should, because if you do not, and the tax office is doing an audit on your tax situation two or three years later, the tax office can take a stand point that the house had a much higher value at the date you moved out. Then you cannot counter their stand point. Will you be audited? Yes, we expect in these situations the tax office to do an audit on your tax return, as there is money to be gained by the tax office.
Orange Tax Services
We think that a professional mortgage advisor will address the topic above and hold your hand through the process. A process you can still make your own decisions. Yes I prefer to buy the car and not have the full mortgage deductions, or no, I want the fiscal most efficient method. We can only suggest you to go to Expat Mortgages as they are just doing this for you, the expat.