We are at the last days in the year 2019. You just digested your Christmas meal and then you have to digest this as well: no more mortgage deduction as of 2023.
No more mortgage deduction
What do you mean? Surely not what is states? Yes I do . Not very exciting, but still a message you need to be aware of.
The mortgage deduction implies that a Dutch tax resident living in the Netherlands in the house he or she purchased, can deduct the costs related to the loan taken out for this purchase from the taxable income.
The European Union has the opinion that this is a state subsidy towards the costs of the purchase of a house of a Dutch tax resident. That is Government subsidy that the EU does not approve of. Hence is has to disappear.
No more mortgage deduction – how is that done?
Since the year 2013 the maximum tax rate against which you can deduct the mortgage interest has been reduced. In the past it was the max tax rate of 52%, but since 2013 the maximum percentage has been decreased. In 2019 you can still deduct max against 49%, next year 46%, 2021 against 43%, 2022 against 40% and in 2023 against max 37,05%.
If you are in the higher tax bracket, you have already noticed less of your costs being set off against the tax due. This will become stronger.
Professors in our line of business have concluded that the moment the maximum tax rate against which you can deduct is 38% or less, the house of which the mortgage is being deducted, can move to Box 3. Box 3 is the part in the income tax return where you report your world wide assets. Your home then becomes a taxable assets, against which you can put the mortgage loan amount you still have on the property. No more mortgage costs deduction.
Will this be a dramatic change?
That depends who you are asking. If you ask the regular Dutch person that purchased the house in 2016 for EUR 350.000 for which a EUR 350.000 mortgage was taken out at roughly 2,4% interest. That house has increased in value over time and is maybe worth now EUR 600.000. The mortgage needs to be repaid in 30 years’ time, so we assume EUR 36.000 of the mortgage has been paid back already. This person pays in 2019 over EUR 314.000 2,4% interest being EUR 7.536.
As a mortgage deduction is not fair compared to the regular Dutch person that cannot purchase or does not want to purchase a home, but rents. Rent is not tax deductible. Hence the mortgage deduction is limited by 0,75% of the so called WOZ value, so compensate the benefit towards persons renting. The WOZ value is the value of the house you are living in and based on the WOZ value you pay local tax.
The EUR 7.536 mortgage deduction is limited by 0,75% over EUR 600.000 WOZ value, being EUR 4.500. So tax deductible in 2019 is EUR 7.536 minus EUR 4.500 is EUR 3.036 at 49% tax is EUR 1.487 tax back. Maybe to bring this more into perspective, this price class house if often purchased by two working persons, hence I assume the salary is in the 40% tax bracket, so the true tax refund is EUR 1.214.
The change of the house from Box 1 in which you can deduct the mortgage deduction to the Box 3 where you cannot costs in this case EUR 1.214 tax not being refunded.
Is this dramatic? Of course it is.
What if we ask somebody else? For that person it becomes less dramatic if the house is longer owned, as the increase in WOZ value makes the mortgage deduction less.
How does that work?
The same EUR 350.000 house could have been purchased maybe in 2012 for EUR 260.000 at maybe 2,9% interest, that now also has the EUR 600.000 WOZ value. Let us assume EUR 60.000 of the loan was repaid in 2019, hence EUR 200.000 times 2,9% interest is EUR 5.800 minus EUR 4.500 WOZ threshold is EUR 1.300 tax can be set off against the taxable income taxed at 40% is EUR 520 tax back.
The low interest rate and the super increase in the economic value of the house, make the mortgage deduction disappear in the current system soon as well.
For whom is no more mortgage deduction dramatic?
The persons purchasing now or in the period between now and 2023 that purchase a house a high value, taking into account the tax refund in their budget, those are the persons that will be hit by the change.
No more mortgage deduction – should that not be communicated?
The day it was announced in 2011 that the maximum tax rates against which you can deduct the mortgage interest, was the day we, the tax professional, wondered where that would lead to. The conclusion was simple, to the 38% tax rate. A tax rate where the house in Box 1 could be converted to Box 3. End of mortgage deduction.
Now in 2019 this change is still not communicated to the public. Most politicians are not aware of this upcoming change. Often this is caused by disinterest in the tax system. Most politicians find taxed boring, we think tax is exciting! How can you find the cash cow funding all Government costs boring? It should be exciting. The more we get in, the more we can spend is what we expect from politicians.
The few politicians that are aware of the change, like the prime minister, know how to avoid the topic. Political suicide it is. So how does a clever politician bring the news without being expelled from the Netherlands? Simple, you have research done (really?). And then you have your civil servants communicate to financial newspapers that the future of the mortgage deduction cannot hold. Quickly to add to this line that the Dutch national bank agrees with this view.
Anticipating what will happen it is announced that the Box 3 tax free amount, currently EUR 30.360 per person, will increase in 2022 to EUR 440.000 per person. That is in line with bringing the house to Box 3, as most people have more value in the house (WOZ value) then debt on the house. So moving the house to Box 3 without such an adjustment will cause havoc. 0
Orange Tax Services – tax is exciting
We think tax is exciting and losing the mortgage deduction is not exciting at all. That being said, since many years it is known that the European Union has demanded the Netherlands to terminate this system. A better moment to do this than in this economy (low interest, high value) cannot be found. Hence we think it is good to make the move now, but we think it is showing poor politics that this important move is not clearly been communicated to the public at large. It can have a huge impact for persons purchasing now, anticipating the tax back due to the mortgage costs.