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Connecting two residential properties and tax

Connecting two residential properties has legal and tax consequences, so think before you act, as you might have wished you had not made the connection.

Connecting two residential properties and tax

The opportunity can arise that you can purchase the apartment of your neighbors. Either your neighbors life next to you, under you or on top of you.  For instance in Amsterdam the living space is not too exotic, hence the thought of making a door, or a staircase (in Amsterdam often referred to as ladder) is quickly made.

What could be the problem?

The serious problem is the city. By connecting a house you basically delete a house from the housing market. That is forbidden. Or to put it differently, you need a permit for this, which is never granted. The city is desperate to facilitate in housing, hence you cannot make a house disappear.  

In Amsterdam it is forbidden to own two residential properties or to rent two residential properties. The exception to this rule is of course the mayor of Amsterdam.

Tax consequences of double housing

We are more excited about the tax aspects of owning two residential properties. The rule is that you can deduct of only one house the mortgage costs. If you occupy two houses and you do not choose of which house you deduct the mortgage costs, so you deduct both. Then none of the costs are accepted as deductions by the tax office.

The exception to the rule is when you move your house. If you purchased or sold your house and you are not able to sell the other house instantly. During a three year period you can deduct the mortgage costs of both houses. The three period is from the time it took three years to sell your house, not one week as is commonly the case now. Condition is that you are indeed selling your house, you need to show selling activities.

connecting two residential properties and tax

Another exception is when you are renovating the house, you cannot move in or out till renovation is done. Then you also have three years’ time to deduct the double costs. If you decide not to sell one of the houses after three years, but rent it out, the tax office will challenge the double deductions.

Connecting two residential properties – court case

A Dutch tax payer connected two houses in such a manner that the garden was connected. Inside there was a connection that could not be closed. Two houses had become one. The one house he reported in Box 3 and the other in Box 1 for tax deductions.

The tax office disagreed. Both houses were to be reported in Box 3 as none of the houses could be allocated as a single home meant for main residence. There was no single home.

The tax payer went to court for the value the tax office applied in Box 3 and the fact of the Box 3 reporting instead of Box 1. The court ruled that the tax office was correct to allocated both houses in Box 3. The value of the properties was corrected to a more useable value.

Tax-is-exciting

We think tax-is-exciting, losing a tax credit is not exciting at all. When you are up for an uncommon decision like connecting two residential properties, check with your legal and tax advisor before you act.

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