The capital gain of the house you sold is not taxed, but money in the bank is taxed in Box 3. What if you temporarily have the yield of the sale in your bank and you have not spend it on the next house. Is that yield taxed?
Box 3 wealth tax
In the Netherlands we tried to simplify the system by putting everything in boxes. Box 1 for your income, Box 2 if you own shares in your own company and Box 3 wealth tax box.
I have written about Box 3 in the past, basically around 1.2% of your worldwide assets you have on January 1 is taxed in the income tax return of that year. Due to the fact that ‘Joe the Plumber’ understood that the tax of 1.2% is more than the interest received, the system has been made very complex but with the same outcome, to stop Joe the Plumber from understanding and complaining.
If you have EUR 100.000 in the bank and you have a tax partner, then EUR 60.720 (2019) is tax free, hence over the difference around 1.2% box 3 taxation is due.
Box 3 wealth tax – temporary money in the account
It does happen outside your influence that you have a sudden amount in your bank, which is intended for a future investment. If that money is in the bank on January 1, it is part of the Box 3 wealth tax calculation, even when the money is taken out on January 2.
Box 3 wealth tax – court case
In November 2016 the house was sold of a Dutch tax payer and the yield of the sale was EUR 168.089. That made that his total assets on January 1, 2017 amounted to EUR 440.654 and he was due EUR 4.701 Box 3 wealth tax. However, the money of the yield of the house was to be used for the purchase of the new house in May 2017.
The Dutch tax payer made a complaint against the EUR 4.701 Box 3 taxation. The argument was that the taxation should be done pro rata for the period the amount was actually on the account.
There are two problems with this complaint.
- Not address by the court, but it is a bit silly to fight the law. It is like arguing you can drive 150km/h at night even though max 130 is allowed. The law is the law and you can only argue the law when it is being made.
- The Box 3 taxation is a rigid taxation is what the court replied. Rigid implies that it is for everybody the same, who has assets on January 1 is taxed for the assets regardless how long these has have been in possession. That is a choice law makers have made in 2001 when this law took its effect. At the time law makers were well aware of the rigid effect it could have and still chose to implement this type of legislation.
The profit of the house was taxed and the tax payer felt very disappointed with the outcome and even suggested to be able to deduct the tax over this profit as purchase costs of the new house. Again a silly suggestion, as it is clearly determined which costs are tax deductible when a house is purchased and Box 3 wealth tax costs are not among them.
Box 3 wealth tax – is there a construction to avoid taxation?
The word construction on its own makes the tax office red flags go out. Construction stands for doing something that is basically not possible. And that is also the answer. If you think I pay up front the notary the money for the house I am going to buy in May, then we expect the notary to send back the money, but if the clever tax payer paid the notary December 30th while the notary was skiing, it is still an asset in the Box 3 tax reporting. At that time there was no obligation to pay the notary, so the money has not left the equity of the tax payer.
Orange Tax Services
In the Netherlands we have a rather detailed tax legislation where most groups in society are being met with their needs and every year the Government invents more needs to be added to the list. The same Government complains that our taxation has become so complex. In the field of Box 3 wealth tax this path has not been followed, which is correct. Tax is unpleasant, nothing much you can do about that. Then again, taxation makes us live in a country with infrastructure and social benefits.
If you then have EUR 440.654 in the bank and you complain about the tax to be paid, should make you understand that we have agreed that persons who can bear more contribute more for the person who can contribute less. Nothing much that can be done about that other than changing the law, but as our Government needs money, new law will result in the same outcome.