Your pride and joy is going to study, either from abroad in the Netherlands or a Dutch boy or girl studying in the Netherlands. Of course the study is done far away from mum and dad, but at the same time mum and dad are called in to help finding some affordable and clean housing.
Purchase a house for studying child
Mum and dad decide to purchase a house or apartment for their children so they can study while living in a place that is also under their control. Besides helping your child, the purchase could be a good investment.
Whether you purchase the house as Dutch resident tax payer or non Dutch tax payer does not make a difference. Based on local law and the Dutch tax treaties the house is taxed in the Netherlands. The house is taxed in what we refer to as Box 3. In Box 3 the value of the house is taxed at 1.2%.
The value of the house is determined by the local county who allocates a so called WOZ value to the house and based on that value the tax is being calculated.
Is this the best method tax wise?
We think not. If you would have your child purchase the house with a loan you provide, the ownership and the taxation is with your child. The house is used as the main residence of your child, hence the house is no longer taxed on the side of the parent in Box 3 at 1.2%. The house is now taxed in Box 1 with the child.
In box one the child can deduct the interest paid to his or her parent over the loan taken out to purchase the house. The interest percentage that has been decided on between the family is based on what is the percentage in the market. The note we need to make in this respect is that the court has decided in the past that you do not need to make the mark up profit with your child. That implies the interest percentage can even be lower.
If you register this loan with the Dutch tax office and that is only possible when the loan meets the criteria set by the Dutch tax office, then the loan is accepted for your children as a Box 1 loan for the house.
Your studying child needs to have a job in order to actually benefit from the tax discount of the loan for the house. That implies that over the little money they earn while studying they get a tax refund due to the house they own.
Not only has the suggestion made above prevented that the parent pays Box 3 taxation over the house, your child has a tax deduction. The beauty of the situation is in the inheritance tax. The parent can donate a part of the loan every year. Either tax free, within the EUR 5000 tax free gift amount, or gradually in higher amounts an then some gift tax is due. So while the value of the house might go up, the loan amount stays the same and that loan amount is repaid with gift tax only. This is a cheap transfer of the assets of the parents to the child. We need to add that if you have more children, you need to do the same with the others. Not from a tax point of view, but more to prevent trouble in the family.
In the event the parent is not living in the Netherlands, the above still applies, however, the rules in the country where the parent lives determine whether or not gift tax is due over the loan amount being donated to the child.
Why is this not possible when the parents purchased the house?
If you donate a part of the house to the children, you have to visit each time the notary, have a deed made of transfer and pay transfer tax. Plus the value of the house could go up, so you are paying gift tax also over the increase in value. Therefore the method of purchase and donation is not one that is effective in any way.
Orange Tax Services
We assist foreigners who own property in the Netherlands. If you own property in the Netherlands you are required to file a non resident income tax return if the value of the house exceeds a possible loan taken out to purchase the house. We learn that most foreigners do not loan at all to purchase property in the Netherlands, which implies immediate tax is due over the value.
The value of the house is taxed in the first of January of each year. That implies that when you purchase the property after January 1 of for instance 2016, you do not need to file a Dutch non resident tax return till 2018 over the fiscal year of 2017. It was only January 1, 2017 that you owned the house for income tax purposes. This 2017 income tax return can only be filed in 2018.
We will be glad to assist you in filing this income tax return, we use a fixed rate, equal to the rate we charge for domestic income tax return. Looking forward to your message.