Termination mortgage deduction and taking penalty now wise?

Mortgage

Termination mortgage deduction is most likely going to be effective in or after the year 2023. Would it be wise to claim after 2023 interest payments now already via a penalty?

Termination mortgage deduction

In 2011 the European Union instructed the Netherlands to stop with the mortgage deduction. Since 2012 the maximum income tax rate against which you can deduct the mortgage interest dropped from 52% to 43% in 2021. This drop continues to 38% in 2023 and the educated tax persons have stated that this is the moment to move the home from Box 1 (tax deduction) to Box 3 (wealth tax).

Our prime minister is not part of this discussion, being a politician, he wants to be re-elected. But Klaas Knot, Dutch central bank manager, who was appointed not elected, can advocate for the house to be moved to Box 3. Right now the International Monetary Funds and the European Union are also both pushing actively to get the mortgage deduction terminated.

Could a penalty solve lack of future mortgage deduction?

In the event you have a mortgage closed in earlier years at a higher interest rate than currently applies, you could think you pay too much interest. You can ask the bank to reduce your rate or you could switch to another mortgage provider to get a lower tax rate.

Your current bank will let you go, but not after you paid a penalty. The penalty is the equivalent of the future interest payments for the remaining period of time of this interest fixed contract. The penalty is probably reduced by the current market interest.

Example

You pay 2,3% interest over EUR 900.000 mortgage loan. You took that out 3 years ago, and fixed the interest for a 10 year period. Now the interest rate is 1,2%, hence you want to switch to the lower interest percentage.  

The bank will ask you to pay 2,3% minus 1,2% is EUR 1,1% over EUR 900.000 for the remaining period of time. That is the penalty. Mind you, we are tax advisors, not mortgage loan advisors, so we might have misunderstood some of the penalty. Please check with your bank before you do anything.

I believe I can hear Henk Jansen laugh at my example now already. Please if you want to get a proper mortgage advise, visit ExpatMortgages.

Termination mortgage deduction and taking penalty now wise?

Paying up front mortgage interest?

The example we explained above shows that switching to a lower interest percentage makes you pay a penalty. The penalty is in fact the future mortgage interest you agreed upon paying to the mortgage provider. By changing the deal, you have to pay what you agreed upon.

Does the switch create an advantage to you? Maybe no. Yes you pay now for a new fixed period a lower interest percentage. No, you paid by means of a penalty now already the balance of the interest rate for the remaining period.

What is the difference?

The difference is, a penalty paid to the bank is tax deductible. In my example the person pays 1,1% penalty over EUR 900.000 for the remaining 7 years of the contract. That is 2022-2028. Paid in 2022 and deducted in 2022. If the interest change is not made, no penalty is paid. The mortgage payment in 2022 could be the last deduction possibility.

Starting from 2023 the mortgage interest deduction might already have been abandoned. A penalty payment not only gained you a lower interest also more tax credits. A note must be made with respect to the WOZ value that corrects the deduction with 0,6%. Should the WOZ value be substantially higher than the mortgage loan, you might already have no more mortgage deduction.

Tax is exciting

We think tax is exciting. Henk Jansen thinks mortgages are exciting. Clearly Henk knows much more about mortgages than we will ever know. So please first connect to your mortgage provider, or if you have none, to ExpatMortgages to check if the above is good for you. If it is, we are pleased to assist you with the income tax return for EUR 390 incl VAT incl tax partner (2021-2022 price) claiming the penalty as deduction.

Mortgage costs deduction other house – back fired

Mortgage

Whether it is a lack of knowledge or a deliberate setup of events. Deduction the mortgage costs of a house that is not your main residence, that is not possible. This the couple in the example in this article gave it a try.

Mortgage costs deduction

In the Netherlands the Government offers the possibility to deduct the costs related to the loan taken out to purchase your house. Often this loan is a mortgage, hence the name mortgage deduction. Also the costs of a loan taken out for certain refurbishments or improvements of the house are deductible.

The costs you make for refurbishments or renovation itself are not deductible.; Only the costs of the loan taken out, is tax deductible.

The condition for this deduction, or subsidy as the European Union addresses it, is that the house is your main residence. You own and live in the house. If you own together with your child the house and your child is living in the house, 50% can be deducted by the child. You, the parent, can deduct nothing. It is not your main residence. You need to report your 50% of the house in Box 3.

If you divorce, there are alternative rules that make for a limited period of time one of the partners can deduct all costs, or each 50%. The total of deduction is then still 100%.

Example – court case

A couple owns in 2009 a house. They leave to house to live in another house. The other house was not owned, either rented or living with friends/family. Later in 2009 a monument building was purchased.

In those years the maintenance costs and an amount of amortization could be deducted in the income tax return. In 2011 the couple moved into this monument building house.

The house the couple owned already in 2009, in which they no longer lived since 2009, was put up for sale in 2011. Those were the days it could take a couple of years before you sold the house, believe it or not. The mortgage interest rate around that time was about 5%. To put in perspective the silliness of the court case.

In the tax year of 2014 the house was not yet sold, hence the mortgage costs of that house were deducted. And EUR 4.975 maintenance costs of the monument building was being deducted.

Tax assessment

The 2014 income tax return, as described above, was accepted without any questions. However, the couple argued the 2015 tax assessment over a EUR 781 penalty. The tax office investigated the matter. In order to do so, they had to look into the history. Also into the year 2014. Then it came to light certain aspects that were not correct.

In the 2014 tax return mortgage interest was deducted of a house that since 2009 had not been their main residence. They took up residence elsewhere before it was put up for sale many years later.

The EUR 4.975 monument maintenance costs were not maintenance costs but electricity costs. Deducted upon advise of the tax advisor.

The tax office decided on the 2015 argument that the penalty was correct, would remain EUR 781. In addition the 2014 mortgage costs for the house for sale was dismissed. For the EUR 4.975 a warning was given, based on the incorrect advise. The deduction remained.

Mortgage costs deduction other house – back fired

Appeal in court

The couple disagreed with the tax inspector 2014 increased assessment as the tax office could not impose this extra tax without probable cause. The 2014 tax return was automatically accepted, now that cannot be changed without a cause.

The court fully agreed with the tax inspector. The 2014 mortgage interest for the house for sale is not tax deductible. Moreover, the court ruled that the EUR 4.975 electricity costs that were presented as monument maintenance costs, was rejected as well.

There was no need for probably cause as the 2014 assessment was accepted based on the assumption it was correct. It was never actually examined. This was the first time the tax return was examined, hence no new probable cause required was applicable.

The 2015 initial argument was granted to the couple. The penalty was reduced from EUR 781 to EUR 343.

Appeal backfired

The couple argued over EUR 781. In the end it cost them the mortgage deduction for one house and EUR 4.975 maintenance deduction. You have to chose your battles well. Going to the high court over a EUR 781 fine is too much of a burden on the costs of society, is my opinion.

Tax is exciting

We think tax is exciting. Getting a tax assessment that is different than the outcome it not exciting. If more tax is to be paid, that is. We can assist you with the appeal. And if we believe the appeal was denied for the incorrect reasons, we will be please to go to court with you. All in perspective of the amounts applicable.

High income, low mortgage deduction – why and how does it work?

Mortgage refund

If you own a Dutch house with a mortgage, the mortgage interest deduction will sound familiar. However, some people have a “Tariefsaanpassing” in their calculation. This would translate to rate adjustment. What is this and how does this work? Please continue reading to find out.

High income, low mortgage deduction

In 2010 the European Union dictated the Netherlands to abolish the subsidy on housing in the form of the mortgage deduction. In 2011 the maximum tax rate against which you can deduct the mortgage costs started dropping. Now in 2021 the maximum rate is 43%.

In case your income exceeds EUR 68.507, the excess is taxed with 49,5% income tax. If the mortgage is deducted from the higher income, the deduction is done at 49,5%. As that is more than 43%, you see in the tax calculation a Tariefsaanpassing. This is the correction to a maximum deduction of 43%.

If you would like to know more about deductible costs, please check out this blog post: https://www.orangetax.com/2021/09/13/deductible-costs-what-is-tax-deductible-and-how-does-it-work/.

High income, low mortgage deduction
High income, low mortgage deduction

How does it work?

You cannot take the rate adjustment into account yourself, this is done in the Tax calculations.

The way this is calculated is as following:
You deduct the tax free threshold of EUR 68.507 from your income. The remaining amount is compared to the deductible costs. The lower of the two is used in the following calculation. Over this amount, the rate adjustment will be 6.5% (2021 rate).

Example
Your taxable income is EUR 100.000, so exceeding the EUR 68.507 threshold. If we deduct the threshold, EUR 31.493 remains. The deductible costs relating to the property are for instance EUR 15.291. EUR 15.291 is the lower of the 2 (EUR 31.493 and 15.291), over this the rate adjustment will take place. 6.5% of 15.291 is EUR 993.


This rate adjustment is added in the calculations as tax due, causing a lot of confusion. It is not actually tax that is due, but because the deductible costs are deducted for 100%, this is the way that the Tax authority corrects this.

No more mortgage deduction

In 2023 it is expected that the percentage of deductible costs that you can receive will lower to 37.05%. Wise men have told us that this equals the moment of transferring the home from Box 1 to Box 3. Men can be wise, but politicians need to sell this to the audience at large without losing the next elections.

How to survive as politician a bad news message? Simply ask someone else to bring the news. For instance Klaas Knot. Klaas Knot is the Dutch central bank director. He is the conscience of the financial world. He constantly brings up the fact that he system of mortgage deduction is a danger for over financing among things. Should be abolished.

New for me is that my tax advisor organization now also challenges the mortgage deduction. However that is from a practical point of view. The simple rule introduced in 2001 has been modified to help the less fortunate in life. Also modified by each political party in the Netherlands that has an opinion. The straight forward mortgage deduction is workable. But in case of death, divorce or marriage/partnership, it is a nightmare. Should be abolished.

Tax is exciting

We think tax is exciting. We are not always excited about politics, as they tend to make a simple plan complex. That is currently happening with the mortgage deduction. In the old days you could at the back of a Heineken beermat calculate the tax refund. Now a sophisticated program is required for a simple calculation. Even though excitement about the rules is out the window, we would be very pleased to assist you claim the mortgage deduction.

Heineken beermat

Averaging tax refund – How does it work and when is it applicable?

income tax

In some years, your income might fluctuate a lot in comparison to other years, for instance when you receive a bonus, vest stocks from your employer or maybe lose your job.  This means that in some years you do not reach the higher tax bracket, whilst in other years your income will be partly taxed against the higher tax brackets.

Averaging tax refund – When is this applicable?

If you have 3 consecutive years of tax returns with income that varies a lot, you might be able to average out your income over these 3 years. This means that your income will be divided over the lowest tax brackets as much as possible in order to lower the tax due.

How does it work?

Averaging tax refund is only applicable for residents, so with the P-form. If The M(iration)-form or the C(non-resident)-form have to be used, you cannot use the averaging method.

You have to file your income tax return for the 3 consecutive years. These annual income tax returns, you file regularly, so not taking the averaging into account. The tax returns needs to be finalised by the Tax authority before you can apply the averaging.

Averaging tax refund

The averaging tax refund is calculated as following:

The income of the 3 consecutive years has to be added together and then divided by 3 years. Each year will include 1/3rd of this income. Over this 1/3rd of the combined income the tax due will be calculated.

As you have already paid the taxes via the annual income tax return or via your employer through wage tax, it is expected that you will receive a refund. If the refund exceeds EUR 545, you can apply the averaging.

The averaging has to be applied within 3 years from the last finalised tax return from the Tax authority.

Example

A person has in the year 2017 EUR 45.000 income, in 2018 EUR 13.000 income and in 2019 EUR 141.471 income. This is the type of fluctuation you need. The refund for averaging out the income was EUR 7.500. We charge EUR 250 for this process.

Please note

You can only average out your income over the same year once. For instance, you have fluctuating income in 2016, 2017, 2018, 2019 and 2020. In that case, you can apply the average only once, even though there are 5 years of fluctuating income.

As you cannot use one year more than once. In cases like this, it is beneficial to calculate which averaging is the most beneficial. If for instance 2021 is another fluctuating income year, you could request averaging for 2016, 2017, 2018 and also for 2019, 2020, 2021. You cannot use the years 2017-2019 and then 2019-2021. That implies 2019 is used twice, which is not possible.

Tax is exciting

We think tax is exciting. Claiming additional tax back for you gets us very much excited. Would you like us to assist you with averaging out your income over 3 consecutive years? Feel free to reach out and we are happy to check whether you meet the requirements.

My name is Kelly Postema and I am happy to assist you.

Averaging tax refund

A preliminary tax assessment – what is it and how does it work?

Box 3 debacle

As an expat in the Netherlands, you sometimes you hear people talking about the preliminary tax assessment. What is that,  what do they take into account, how do they work, is this beneficial for me and when do you request it are questions we often get.

What is a preliminary tax assessment?

As the name states, it is a tax assessment which is calculated preliminary. A preliminary tax assessment is requested during the year it relates too. This means that this request takes into account expectations and calculations as the final figures are not known yet.

What do they take into account?

A preliminary tax calculation can take into account similar information as the annual income tax return. Such as your income, your Dutch main residence and the deductible costs. Also your assets, if you are not entitled to the 30% ruling.

A preliminary tax assessment can also be filed for one man companies to pay the tax in advance. A preliminary tax calculation can also be based on part of the information. For instance only relating to the income from the one man company, only relating to the Dutch property or only relating to the assets.

Preliminary assessment

How does it work?

The preliminary tax assessment results in either too pay tax or a tax refund. This result will be divided over the remaining months of the year it relates too when filed. Meaning that you will pay or receive the amount in monthly instalments.

The outcome of a preliminary tax assessment is settled with the outcome of the annual income tax return relating to the same year. For instance, the 2021 preliminary tax assessment will be settled with the outcome of the 2021 annual income tax return.

Example

The preliminary tax assessment paid out during the year for EUR 4.800 due to mortgage deduction. At the end of the year it turned out you either paid less interest, or the threshold was higher. The income tax return comes to EUR 4.600 refund. As you already received EUR 4.800, you need to pay back to the tax office EUR 200.

Is the preliminary assessment beneficial for me?

This depends on your personal preference. The final tax result will remain the same. The biggest difference is when you pay/receive the amount. The preliminary tax assessment results in monthly instalments and the annual income tax return results in a one time instalment/payment. Some need the monthly up front refunds to pay for the costs of the mortgage.

In  case of a one man company we recommend you to already pay upfront the income tax in instalments. The one year you earn more than the other. The tax office also prefers you to pay as you go, hence the tax office can levy  a preliminary assessment with you without you asking for it.

A preliminary tax calculation is also a tool to calculate your tax obligations.

When do you request for the assessment?

You can file your preliminary tax assessment during the year it relates too. When you expect to receive a tax refund, for instance relating to the deductible costs of your property. You can also request this if you are expecting having to pay tax at the end of the year, for instance when you have your own company or have assets exceeding the threshold.

Tax is exciting

We think tax is exciting. We are excited to claim back up front some tax already for you. Monitoring the preliminary refund we recommendrefund. The tax office automatically converts the refund to the next year, but maybe you are entitled to less refund in that year. Paying back tax is not exciting.

The author of this article is Kelly and Kelly is eager to assist you with your tax assessment.

No more mortgage deduction?

No more mortgage deduction?

Did you read that correctly, no more mortgage deduction? Maybe yes.

No more mortgage deduction

It might come as a shock to you, but it is indeed possible that as of 2023 there will be no more mortgage deduction. For us tax advisors this is old news. The European Union instructed the Netherlands at the start of the century to stop the subsidy on private housing.

As per 2011 this instruction of the European Union has been put in place. Since then the mortgage deduction could no longer be deducted at 52%, but max 51,5%. That maximum amount dropped to 43% in 2021.

What does that imply?

The mortgage deduction can be taken into account in the income tax return for max 43%. You might earn an employment income taxed at max 49,5% income tax, still the mortgage deduction can be set off for max 43%. That implies 43% of the balance of the mortgage deduction is actually paid out to you.

In 2022 that maximum is 40% and in 2023 it is 37,10%. Academics have stated that the 37,1% equals Box 3 taxation. This implies as of 2023 the possibility exists the house moves from Box 1 to Box 3. In Box 3 we do not know a mortgage deduction.

Why is this not communicated?

Recently we had elections and as it continues to go like it does now, we might soon have elections again. A politician that announces that the mortgage will soon no longer be deducted, does not get reelected.

Instead, the politicians send out people that are less vulnerable by the choice of the public to gradually announce the news. You might know Mr Klaas Knot, the person that predicts what is best for the people and the state, from a financial point of view. He was asked already to start publishing about terminating the mortgage interest.

That will cost a lot of tax

Box 3 taxes the house by taking the so called WOZ value, the value set by the county. From this value is deducted a possible mortgage debt. Over the balance is paid roughly 1.4% Box 3 tax, depending on the other aspect in Box 3.

As since 2012 it is set obligatory to repay the mortgage over a maximum period of 30 years, many home owners have already less debt then the WOZ value. That would imply the movement of the home from Box 1 to Box 3 will hurt them.

To avoid the public at large to complain, the Dutch Government has already published a plan to increase the tax free amount per person in 2022 from EUR 50.000 now to EUR 440.000.

Who will actually be affected by this possible change?

Right now the interest rate is about 1%. I think Henk Jansen of Expat mortgages will not appreciate it that I make it this simple. Let us assume it is 1%. The threshold of the deduction is 0,6% of the WOZ value. The WOZ value will after the purchase quickly equal the purchase price. Hence your deduction is 0,4%. That you will lose.

If numbers are high, and in this crazy housing market, numbers are high, even 0,4% deduction can become a high amount. When you are only able to afford the house when you take into account the income tax refund, this change will hurt you.

That implies new comers to the market and persons that loan a lot compare to the value of the house are affected as well.

The interest rate is now (May 2021) extremely low. A change from Box 1 to Box 3 will be noticed, but a lot of home owner have already little or no deduction. It will hurt a bit, not too much. Assuming the EUR 440.000 credit also gets in place. However, should the interest rate go up significantly in the period up to 2023, then this change will hurt much more people than it does now.

Tax is exciting

We think tax is exciting. We are excited about claiming some tax back for you. Like the home owner tax credit. We also understand that tax rules are under constant change, how else could we have a living? Timely communication about significant changes is important for everybody. The question is now, what is the timing?

Termination registered partnership and mortgage deduction

One man company – our quote

Termination registered partnership and mortgage deduction can have an impact on your liquidity flow if done incorrectly.  What is this about?

Tax partner

In the Netherlands you are tax partners when you are:

– married, or
– registered partners, or
– both own the house that is your main residence, or
– have children together, or
– are mentioned on each other pension insurance as beneficiary

Tax partners and mortgage deduction

Tax partners can chose who deducts the mortgage interest. If the one partner owns the house and has the mortgage in his or her name. The tax return of the other partner can yield a higher tax credit. Tax partners can choose who deducts what.

Till 2020 it was always the highest earning tax partner that could claim the highest mortgage refund. Since then a lot has changed and per partner it needs to be checked who can claim the most. It is possible that is not the highest earning tax partner. So exciting!

Termination registered partnership and mortgage deduction

Ending tax partnership

In the event the couple have a divorce or terminate the registered partnership, the couple is no longer each other tax partner. This could be inconvenient from a tax point of view, hence the Dutch tax office offers to opt to remain tax partners during the full tax year, in which the couple are separating. Regardless how long they are both registered at the same address.

Termination registered partnership and mortgage deduction – court case

A couple terminated the partnership mid year. She owned the house and mortgage. He claimed back the tax credit, which was paid in the mutual bank account.

They did not opt to remain tax partner for that full year. The tax office corrected his tax return as too much mortgage deduction was claimed.

He went to court, he even appealed in the higher court. In both cases he lost, as the rules are very clear. No tax partners, no tax credits from the other partner.

Tax-is-exciting

We think tax-is-exciting. Separating is not, or for some is very much exciting or a relief. That is emotion, tax is business. If you can come to terms where you look at the tax return business wise, some tax credits can be obtained or saved. However, if there is so much distrust and arguments going back and forth, the costs of paying more tax is the price of relief.

Mortgage interest is not alimony

One man company bookkeeping

Mortgage interest is not alimony does  you  not need a tax degree to understand that. Still, in some situations it is tried to paint this picture for the tax office.

Mortgage interest is not alimony

We have a limited number of tax deductions. Within this limitation is the mortgage interest deduction and also the alimony deduction. Mind you, only alimony paid for the ex-partner. Children are never a write off, so alimony paid for children is never tax deductible.

The mortgage interest gets connected to the alimony in case of a divorce. When both people own the house and have the mortgage in their name.

Example

EUR 300.000 mortgage on the house that both partners live in. Interest rate is 3% then 9.000 mortgage interest is paid.

Let us assume the partner leaving the house during the divorce is also the person earning the money. The EUR 9.000 mortgage interest is paid by this partner. These interest payments continue to be paid by this partner, even though this person no longer lives in the house.

Mortgage interest is not alimony
Mortgage interest is not alimony

Mortgage interest deduction problem

The problem is the tax deduction. Mortgage interest is tax deductible if the interest is paid for the house that is the main residence of the tax payer. Clearly that is no longer the case, as the partner that pays the mortgage interest moved out.

The mortgage interest is therefore no longer tax deductible.

Alimony partly solution

The solution to the mortgage interest deduction problem is paying an alimony to your ex-partner who still lives in the house. But this is only a half solution, as this partner who remained behind can only deduct the percentage of the ownership of the house. That implies the full mortgage payment is for 50% deductible in this case. 50% is more than nothing.

The solution is to transfer the house in full in the name of the partner that still lives in the house. Often the person not paying for the mortgage also does not have enough salary to take over the mortgage on the house. Hence this is not always a possible solution.

Alimony full solution

If you are able to transfer the house in the name of the partner leaving behind, then the alimony income is taxable income, but  now 100% of the mortgage is tax deductible. The winner, if at all in a divorce situation, of this deal is the partner who no longer lives in the house. The alimony paid is fully deductible, the mortgage interest deduction is limited by the WOZ threshold amount.

Alimony denial court case

A couple divorced on terms of neither paying for alimony to the other. That was fixed in the divorce settlement letter. That said, the house and the mortgage remained in both their names, even though one of the partners had left the house.

The partner living elsewhere paid directly his/her part of the mortgage interest to the bank. Claimed that as alimony deduction. That deduction was denied by the tax office and later the court, as both had agreed on no alimony payments in the divorce settlement.

Tax-is-exciting

We think tax-is-exciting, a divorce is not. Nevertheless it is always important to contact the tax advisor before you settle the divorce. Then an alimony payment would have been suggested.

By taking up contact with your tax advisor we strongly suggest each of the partners separately contacts maybe each a different tax advisor. We have had couples in the office that started the divorce fight in front of use again. Little good a tax advisor can do in such situations. No good actually when you explain that the alimony is fully deductible, but the mortgage deduction is limited by the WOZ threshold.

Sorry for the dashes in the middle of the word tax-is-exciting. Apparently Google has a dirty mind and sees only a three letter word that we refer to when we practice to reproduce ourselves. Anything related to that word is spam, hence this devout solution.

Reduced transfer tax for starting home owners

It is now late 2020 and a current hot topic is the reduced transfer tax for starting home owners. What is exciting about that?

Transfer tax – what is that?

In the Netherlands tax is due when you purchase property. The proceeds are used for funding general Government costs such as health care and infrastructure. It was introduced under Spanish occupation by Alva at a rate of 10%. After the 80 year Spanish war that lasted 68 years (trivial pursuit question)  the Dutch very much liked this source of income. Now it is being updated.

Reduced transfer tax for starting home owners

Reduced transfer tax – what will change?

Starting from 2021 there will be a 0% rate, a 2% rate and a 8% transfer tax rate.

0% Transfer tax rate

Under the condition that:

– you purchase a home starting from January 1, 2021 in the Netherlands;

– purchased by a private individual, who will dwell in the house him or herself and has made the appropriate statement to that effect;

– a person who is in the age between 18 and 35 years old;

– who applies for the first time for this zero transfer tax rate,

then the zero percent transfer tax rate can be applied.

2% Transfer tax rate

The 2% transfer tax rate applies already and will apply starting from January 1,2021 when the conditions set out under the 0% transfer tax rate are not being met. A condition is that the home purchased is used for own dwelling and it is not commercial property.

8% Transfer tax rate

The 8% transfer tax rate applies to all situations in which property is purchased that does not qualify for the 0% or 2% transfer tax rate.

The purchase commercial property such as an office, shop, restaurant etc, 8% transfer tax applies.

When the buyer of the property, commercial or non-commercial, is a company or legal vehicle, 8% transfer tax applies.

And when the buyer of the property is going to rent out the property, 8% transfer tax applies. Even if the property is in the end not rented out, but only fixed up and sold.

Tax-is-exciting

We think tax-is-exciting. Moreover we think that the zero percent under the mentioned conditions is a good step for the target group. We noticed that the 8% rate applies if a company purchases a private home. Unless an employer likes to facilitate employees with housing, we never think a company should purchase a home. In the Netherlands we do not know the concept of capital gain tax for private individuals. For companies we do know the concept of capital gain tax. Under the current market situation a gain is very likely to be achieved at sale, hence we recommend not to use a company to obtain ownership of a home.

Sorry for the dashes in the middle of the word Tax-is-Exciting. Apparently Google has a dirty mind and sees only a three letter word that we refer to when we practice to reproduce ourselves. Anything related to that word is spam, hence this devout solution.

Mortgage interest deduction and your tax partner – what if your partner leaves?

Mortgage interest deduction and your tax partner, what if your partner leaves, whether that is a relief or a burden is for us not relevant. Relevant is that there are tax consequences and we can get excited about.

Mortgage interest deduction

If you or you and your partner purchase a house together which will become your main residence, then the costs related to the loan taken out you can deduct from the income tax return.

If you are not married or not a registered partner with the person who you purchase the house with, not only the signature under the loan is your biggest investment that day, the purchase of the house also make you tax partners.

Being a tax partner implies that you file a joint tax return, you can decide who deducts what in the tax return. The income of the tax partner can also reduce your ability to claim a tax credit. If you both work and have children, then additional tax credits can be obtained. If one partner dies, which is not exciting, the other partner has the huge tax exemption amount which limits inheritance tax, that we do get excited about. So being tax partners has consequences.

Mortgage interest deduction and your tax partner – what if your partner leaves?

Leaving for a holiday is ok, but leaving the house you bought together because that is better for each of you your personal lives, then the house is no longer the main residence of one of the partners. The mortgage deduction is based on both partners residing in the house, but if one leaves the other one can only deduct 50% of the mortgage cost as the other partner only owns 50% of the house.

The same applies to the WOZ amount that is added to the income as a kind of threshold, that you also need to take into account for 50%.

Mortgage interest deduction and your tax partner

Mortgage interest deduction and your tax partner – court case

A Dutch couple divorced in 2017, but she had already left the house they both own mid-2015. The man stayed in the house, paid all the costs and deducted all the costs. Not stated in this court case, but something we can share with you. Divorce applications are separately monitored by the Dutch tax office, because of all the tax implications that come with it.

As divorces are monitored, the tax filings are better looked at and the tax office notices that the woman registered herself at a different address. You do become tax partners if you purchase the house together that is your main residence, but if one leaves that address so is not registered at that address for at least 6 months per tax year, the couple is no longer regarded tax partners.

This was the case. The tax office denied 50% of the deduction.

The court decided as follows

The  tax payer who stayed in the house went to court, but the court agreed with the tax inspector. They even tried in court to deduct the other 50% as costs of live of the leaving partner, which could  be deductible if actual arrangements were made, which was not the case.

Tax is exciting

Having an argument with your partner is not exciting, but before anybody is asked to leave the house you both purchased and took out a mortgage for, think about your tax advisor. Contact your tax advisor to learn what is best to do, preferably not while you are having an argument that is.

AirBNB income taxed or is it?

AirBNB is a platform via which you can rent out the house that is your main residence during the period you do not use the house. For instance during your holiday. Is that income taxed?

AirBNB income taxed

The income earned with AirBNB is subject to Dutch income tax if you own the house you rented out. If you do not own the house, but you rent yourself, we doubt you can put the rental on AirBNB, as the landlord most likely does not give permission to sub rent the house due to all kind of rules and regulations.

Hence we assume you own the house you are putting up for AirBNB. In the Dutch income tax return you find that the house is in Box 1 as the house is seen as a source of income. As you most likely took out a mortgage to purchase the house, part of the source of income is that you can deduct the costs related to this source of income. That is how you get tax back for the mortgage interest.

For us tax advisors is it logic that when the house is in Box 1 explicitly being a source of income, the income generated with AirBNB is part of the taxable income. That is also the logic of the Dutch tax office, hence you are obliged to report 100% of your AirBNB income and then 70% of this income is taxed in Box 1. This certainly spoils your short lived enjoyment of the income, but that are the rules of the game.

Or are they?

AirBNB income taxed or not?

In a court case for the higher court, the garden house was yielding EUR 3500 annual AirBNB income and the tax office was charging over 70% of this income, Box 1 income tax over the past five years this income was not being reported.

The court stated that the garden house was not the main residence of the tax payer, hence the AirBNB income should not be taxed in the progressive tax rate maxed at 52% but in the Box 3 wealth tax box with a tax rate of about 1.2%.

Your initial thought might be of enjoyment, but is this enjoyment? We think not. The garden with the garden house is part of the plot you purchased with the house for which you secured a mortgage.

The interest related to this mortgage is fully deductible in Box 1. However, as now the court has ruled that the garden house is not part of the main residence of the house, the garden is not part of the main residence.

As only the financial costs of the loan taken out for the main residence are tax deductible, this outcome implies the pro rata part related to the garden is no longer tax deductible.

Example.

  • You purchased a 200 square meter house with a 200 square meter garden for EUR 800.000.
  • The mortgage is for EUR 800.000 at 2% being EUR 16.000 interest costs per year.
  • EUR 6.000 of these interest costs you cannot deduct due to the WOZ up count.
  • We assume you are in the 52% tax bracket, max 49% is tax deductible

In the income tax return the EUR 16.000 mortgage interest is a tax deduction that is compensated by the WOZ value for EUR 6.000, hence EUR 10.000 is deductible at 49% is a EUR 4.900 refund.

The garden house yielding EUR 3500 for which you paid 52% tax over 70% of this income in the income tax return is EUR 1.274 tax paid for the AirBNB income.  

But now the court stated that this is not part of the source of income. As the garden is 50% of the total, we make a simple assumption 50% of the EUR 16.000 mortgage interest  you no longer can deduct. The WOZ up count will be less as well, let us assume that also reduces with 50% to EUR 3.000.

Using the outcome of the court case the AirBnB income of the Garden house is as follows. The actual income of EUR 3.500 we disregard. Taxed is the value of the garden, EUR 400.000, minus the debt related to the garden, EUR 400.000, is zero. Hence zero income tax is due over the AirBnB income.

Then pro rata the mortgage deduction no longer applicable. That implies EUR 8.000 mortgage deduction limited by EUR 3.000 WOZ value is a EUR 5.000 deduction at 49% being EUR 2.450 tax refund.

The court case made the AirBnB income tax free and your tax refund reduced from EUR 4.900 to EUR 2.450. In other words, to avoid paying EUR 1.274 tax over the AirBnB income, you now get EUR 2.450 less tax back.

AirBNB and the Dutch tax office

The Dutch tax office might have appealed the outcome or embraced the outcome. The European Union instructed the Dutch Government to terminate the subsidy on housing via the mortgage refund. That is the reason why the deductible percentage is this year 49% instead of 52% and next year 46%.

If people then rent out a part of the house/garden and it is decided that this part of the house/garden is not part of the main residence, the tax deduction is significantly less, which the Dutch tax office will favour. Hence we doubt the tax office will appeal the outcome as basically they have won.

Orange Tax Services

AirBnB income is for us a tricky subject, the moment we explain that over 70% of the income the progressive tax rate (often 52% tax) is due, we hear through the phone already that we are crashing the party. Then suddenly the income was not so high, and no income was earned over previous years.

That is the moment it becomes tricky for us, as we , Registered Tax advisors, need to file a correct income tax return. Not an income tax return where a bit of the AirBNB income is included.

Regardless of this extra source of income, our fee to file remains fixed at EUR 390 incl VAT including tax partner.

Less mortgage refund, how is that possible?

You see your taxable income go up and your mortgage refund go down, where as you would assume if you pay more tax, you get more tax back. What is happening?

Mortgage refund

In the Netherlands it is normal to purchase a house for personal use and loan 100% of the purchase price. Henk Jansen of Expat Mortgages would add that this is not normal, it use to be 112% as you could till recently also mortgage the purchase costs. Those days are over, but are the days of tax refund over as well? Not yet.

The mortgage interest you pay to the bank is deductible from your taxable income. If you earn EUR 20.000, then this interest is deductible at 37% income tax. If you earn EUR 50.000 this interest is deductible at 40% and if you are in the highest tax bracket you could till recently deduct the interest at 52% income tax.

In the Netherlands we like to keep the gap between persons renting and persons owning not too big, so the advantage of the mortgage deduction is limited by the so called WOZ value. The WOZ value is a value determined by the city the house is registered in and roughly 0,75% of the WOZ value functions as threshold for the mortgage deduction.

Mortgage refund

Less mortgage refund

How then do we get to receiving less mortgage refund? That is caused by multiple reasons. One reason is that the so called WOZ value is determined every year and every year it is higher, as the housing market is booming. Higher WOZ value implies higher threshold, which yields in less refund.

The other reason is that you pay back the mortgage loan. Till about 2012 nobody paid back the mortgage loan, as you could have repayment free mortgages, that has changed. Less debt is less interest. Less interest is less deduction.

The final cause is the tax rate. You might think I earn an income in the 52% tax rate, so I can deduct the mortgage interest at 52% tax, but that is no longer the case. In 2018 the maximum rate of deduction was 49,5%. In 2019 it is 49%, 2020 46%, 2021 43%, 2020 40% and then in 2023 it is 37,05%.

So you see the WOZ value makes the threshold higher, the loan makes the interest base smaller and the tax rates makes the deduction lower.

Mortgage refund or early repayment?

Sometimes the question comes up if with the lower tax advantages it maybe better is to pay back the mortgage full or partly earlier than the repayment scheme. It goes without saying that you first need to be in the position to do so and if you can the historic question comes up: do I let this cheap method of loaning money go or do I keep it and yield more income with investments? And on such a question we have no answer.

We do know that if you want to make an extra repayment you are often charged a penalty for this extra payment. This is a tax deductible penalty. Having less debt makes you have less issues in the case of a crisis. Economic crisis or a crisis of losing your job.

Would you like to get a mortgage?

If you are in the market of purchasing a house and you would like to learn more about whether you qualify for a mortgage, how to purchase a house, how to get the house in your name or how to get the mortgage refund, visit one of the free Expat Housing Seminars we organize.

Orange Tax Services

We are tax advisors that help you comply with the tax filing obligation when you owned a property in the Netherlands. Either occupied by yourself or rented out, a tax return needs to be filed.