Family mortgage and tax deduction is a frequently asked question. What are the requirements and possibilities?
Family mortgage and tax deduction
The costs related to a loan taken out to purchase the house that is the main residence, are tax deductible. Most tax payers loan from a mortgage bank, advised by ExpatMortgages. That is the obvious route and obvious advisor.
Some have the luxury of wealthy parents or family. They can simply give you the money and you buy the house. But your family has not become wealth by giving away money, hence they do not. Instead they are willing to loan you the amount.
What is a loan
A loan is an agreement where the one provides an amount. The other agrees to repay in a certain period the full amount plus pays interest on a monthly or annual base.
We are often asked if a zero interest loan is possible. The answer is no, the most important criteria of a loan is then missing. The court has ruled that a family does not need to make the same profit on a loan as a bank, so the family could charge slightly less interest.
Some ask if the loan amount needs to be repaid. Yes it does. For the interest to be a tax deductible interest applicable to the house that is your main residence, the loan needs to be repaid in a maximum period of 30 years.
Do we need to pay the interest on the loan?
With a mortgage bank you have no choice, otherwise the house is claimed and sold from you. With a family it is different.
The tax office noticed families charging interest over the loan. At the same time the family returned money to the tax payer as a gift. Amounts were similar. You could argue no interest was being paid. If no interest is paid, there is no cost, hence no tax deduction.
Our minister of finance state about the above the following:
It has come to the attention of the Minister that the family loan is popular. Very popular. So popular that the tax office is concerned the rules are being obeyed. Hence the Minister is asked his opinion. His opinion equals a rule.
The opinion of our minister:
The moment a family agreed upon a loan agreement. And the interest rate applied in that agreement is accepted as such in the tax rules. The repayment does not exceed 30 years. The loan is spend on the house that is the main residence. Then the costs of this loan are tax deductible.
When at the same moment this family refunds the actually paid interest as a gift to this tax payer, then this is regarded a gift. It cannot be state no interest has been paid.
These two facts are not to be seen combined. There is the repayment of the loan and interest. This is one tax aspect. And there is a gift subject to gift tax. That is another tax aspect. Fully acceptable.
Tax is exciting
We think tax is exciting. It is wise not to give away money, but loan the amount instead. Receiving interest and repayment of the loan on the one side. Separately paying back the amount as gift is accepted by the tax office. That said, this should not be a paper trail, but actual transactions.
