Basic tax implications of a divorce

This article desrcibes a couple of implications in case of a divorce.

Fiscal partnership

In a divorce situation fiscal partnership ends at date of divorce or the earlier date that both the partners are not registered at the same address and a request for divorce was filed.

In the year of the divorce, it is still possible to opt for full year fiscal partnership and, as such, the negative income from principal residence (mortgage interest deduction) can be allocated in any given proportion between the two former partners in the year of divorce.

The year following to the year of divorce, fiscal partnership is no longer applicable. As a consequence, sources of income which used to be joint income items, such as the mortgage interest deduction and Box III income, can no longer be allocated freely between the partner in their income tax return. Instead, the (former) principal residence and Box III income, needs to be reported on the basis of legal ownership.

Principal residence

The principal residence, for which tax deduction applies, is basically the house in which you live. There are some exceptional situations, where the house can still be considered as a principal residence, after moving out. One of these exceptions is in the situation of a divorce. In case of a divorce, it can still be considered as (former) principal residence up to 2 years from the date that one leaves the house and deregisters provided that the ex-partner continues to use the house as principal residence.

In the tax return, when reporting the principal residence, “deemed rental income” (based on the WOZ value) is added as income (so-called deemed rental value) and costs related to the finance (mortgage interest and costs) are deducted. The result is the (often negative) income from the principal residence.

After the fiscal partnership ends, the house should be reported on basis of ownership and the costs (mortgage interest) is split on basis of ownership as well. The partner remaining to live in the house can deduct his/her ownership part of the negative income from principal residence as long as the house is used or otherwise qualifies as a principal residence. The leaving partner can deduct his/her ownership part of the negative income from principal residence for max. two years and after that period there is no deduction anymore. The house and related loan move to Box III. It is usually recommendable most often to agree that the house is sold as soon as possible or that the house becomes 100% ownership of one of the partners.

If it has been agreed that the remaining partner has the full benefit of the house, the leaving partner can deduct his/her part of the deemed rental value as alimony (regardless whether within or after the two year period) which benefit in kind is taxable at the remaining partner.

Mortgage interest as alimony

If the partner who remains living in the house does not have income (or little income) it is possible that deduction does not lead to tax benefit (or only a bit). If the partner with income moved out, there is possibility to make arrangements, due to which costs are deducted against high interest rate. You can agree on paying the amount of the mortgage interest to the former partner as alimony.

As such, the ex-partner who moved out of the principal residence pays (i) his/her own (ownership based) part of the mortgage interest and deducts that amount for max. two years and (ii) pays the amount of the ex-partner to the ex-partner (who lives in the house) as alimony/life support contribution and deducts that amount. As a result, you have a 100% deduction (partly as deduction principal residence and partly as alimony). The ex-partner who remains living in the house reports the received amount as income and deducts the mortgage interest. The result is then nil.

Below is a schedule summarizing the above and a plain example.

 

Fiscal partnership & allocation
  • Fiscal partnership ends in case of legal divorce or, earlier, if partners are not registered at the same address anymore and a formal request for divorce was filed.
  • If partners qualify as part-year fiscal partners, they can chose for full year partnership allowing them to allocate joint income items in any given proportion between them.
House: Box I or III Partner remaining in the house:

  • Ownership percentage of the house remains in Box I and mortgage interest (after deducting of the deemed rental value) remains tax deductible as longs as house is used as main residence.

 

Leaving tax payer:

  • Ownership percentage of the house remains in Box I and mortgage interest (after deducting of the deemed rental value) remains tax deductible for max. two years after leaving the house provided the ex-partner still uses the house as main residence.
  • If, within aforementioned two year period, the ex-partner does not use the house as main residence anymore, the house and related loan both go to Box III and the mortgage interest is not deductible anymore.
  • After two years, in all events that mortgage interest is not tax deductible anymore and the house and the related loan go to Box III (if not already due to the ex-partner not using the house as main residence anymore)

 

Alimony Child alimony

  • Alimony is not deductible for the payer and not taxable for the child.

 

Partner alimony / life support contributions

  • Alimony payments and/or contributions for life support to the ex-spouse are deductible for the payer and taxable for the receiver.
  • The contributions are ideally determined by the court, but otherwise agreed to between both ex-partners (preferable, but not necessarily, in a formal agreement in writing).
  • Payments made before the divorce was confirmed by the court can be deducted provided it is reasonable and for the purpose of life support. You have to split between ex-partner (deductible) and child (not deductible). Examples of contributions made for life support besides a standard regular amount agreed (which is not excessive) include for instance payment of health care premiums, ex-partner’s share of the mortgage interest (note: not repayment of part of a loan as this not life support) or utilities.
  • If ex-partner has the right to live in the house, the ownership percentage of the deemed rental value of the partner who left is deductible as alimony (regardless whether paid within or after two years of leaving). That benefit in kind is taxable alimony for the receiver.

 

Example

Pete and Susan are getting a divorce. They have two children and lived together for a few years in a house in Amsterdam. They are married in community of property. Susan has a small part-time job, Pete has a fulltime job. Pete has left the house on March 1 and the children remain with Susan. Pete has deregistered and a request for divorce has been filed. This was done after 6 months Pete left the house, i.e. on September 1. In consideration of alimony and offer life support contributions, they agreed that Pete will continue to pay the interest and will also pay Susan’s share of the monthly repayment until a solution has been found for the house (sell or 100% ownership with Susan). Pete is also paying for the school costs of the children plus a monthly amount for their life support.

 

  • Pete and Susan remain fiscal partners until September 1. They can chose for full-year’s fiscal partnership.
  • Pete can still deduct 50% of his mortgage interest paid (after consideration of the deemed rental income) for a maximum period of two years after he left (March 1). Susan’s part is deductible for Pete as alimony/life support contribution, Susan is taxable on that (but can deduct that part mortgage interest).
  • As Susan has the benefit of the house, Peter’s deemed rental income part (50%) is considered as taxable alimony for Susan. Peter deducts the same amount as alimony (in kind).
  • The amounts paid for the children are not taxable for the children and not deductible for Pete.

 

ZVW (Dutch health insurance)

Kindly note that the income-depending Dutch Health Care Act contributions (ZVW at a 5,65% rate in 2019 up to a certain amount of income) may be levied on the alimony income for the ex-partner who receives alimony.