Dutch tax treatment of real estate

This memo describes several basic tax treatments of Dutch real estate. A distinction is made between the situation that the house is used as (i) principal residence or (ii) as investment property. The information below is to be seen as basic information only and is not meant as complete, it serves as basic guidance and it is not meant to describe all conditions or features in too much details. The rules on real estate are simply too detailed and depend very much on the factual circumstances. Besides, case law is not clear on a number of scenarios where (part of a) house is rented out, such as Airbnb.

The below describes the 2020 rules, further changes have been announced to be applicable as of 2021 or 2022. These have been partially addressed in this memo. Each year, there are usually little changes to mainly the Box I treatment of a house resulting in less beneficial tax treatment for principal residences.

(i) House as principal residence

Basic tax treatment

  • Negative income from principal residence is deductible whereas positive income is taxable in Box I.
  • Negative income is the amount of mortgage interest and finance costs exceeding the deemed rental value or other positive income
  • Mortgage interest and costs for a loan are deductible provided the loan meets the conditions for mortgage interest deduction:
    • The loan is used for the purchase, improvement or maintenance of the house; and
    • As of 2013, the loan must be based on at least an annuity based scheme that must be repaid within 360 months (note: for loans taken with non-Dutch financial institutions, such as family member or foreign banks, additional reporting requirements apply). For loans concluded before 2013, grandfathering rules apply for mortgage interest deduction (no repayment requirement)
    • If the loan does not meet the conditions, the loan is in Box III (whereas the house is in Box I). In some case, this can be more beneficial)
  • There are three types of positive income elements:
    • Deemed rental value: the deemed rental value is based on the WOZ value (value assessed by the municipality). In 2020this standard deemed rental value is 0.60% of the WOZ value whereas it is 2.35% if and insofar the WOZ value exceeds € 1,090,000. Deviating deemed rental values apply for specific situations (see further below)
    • Income from temporary renting out your house (70% of the rental income is taxable)
    • Interest from an endowment insurance or comparable bank/investment savings product insofar included in the taxable amount of the capital payment in excess of the applicable exemption amount
  • To the extent that the mortgage interest is deductible and has led to deduction at the highest rate (49.50% in 2020), a tax rate correction is added of 3.50% following the principle to allow mortgage interest deduction to take place at 46% in 2020. As per the 2019 Budget plan the mortgage interest deduction will be further limited over the next three more years with 3% per year to ultimately 37.10% in 2023 (43% in 2021, 40% in 2022).
  • Mortgage interest deduction limitations may apply if in the past a house was sold or otherwise alienated (such as renting out resulting that the house moved from Box I to Box III) whilst the proceeds or fair market value of the house exceeded the mortgage loan amount and a new house is bought or otherwise is treated as a Box I house within 3 years of that prior sale or alienation
  • If no mortgage interest is payable or the amount of mortgage interest is lower than the deemed rental value, the positive surplus was not taxable before 2019. Per 2019, there is a phase-in of 3.33% of each year. Hence, if no (mortgage) loan applies, the taxable positive income from principal residence is 3.33% in 2019, 6.66% in 2020, 9.99% in 2021, etc to 100% in 2048.
  • The Netherlands does not levy capital gains tax when selling real estate that used to be someone’s principal residence

Special situations

Sale regulation:

  • Temporary double mortgage interest deduction (on principal residence and the house that is on sale)
  • 0% deemed rental value
  • Mortgage interest deduction for year of sale and max. 3 calendar years thereafter (3+ year period)
  • Temporary renting out is allowed, resulting in Box III treatment for the renting period during the 3+ year period

Purchase regulation:

  • Temporary double mortgage interest deduction (on principal residence and the house that is purchased and empty / being build or renovated)
  • 0% deemed rental value
  • Mortgage interest deduction for year of purchase and max. 3 calendar years thereafter (3+ year period)

Temporary stay elsewhere:

  • Only mortgage interest deduction on the prior residence that (i) has been principal residence (ii) for at least one year and (iii) is temporary not used as principal residence anymore (iv) without being rented out or to put into disposal or someone else (with exception of children below 27 years of age that belonged prior to the household and subject to further conditions) whilst (v) there is no other principal residence
  • 00% deemed rental value of the WOZ value whereas it is 2.35% if and insofar the WOZ value exceeds € 1,090,000
  • Mortgage interest deduction for period that the house meets above conditions

Other:

  • Other situations include divorce and stay in a nursery home. These are not further described in this memo, but subject to conditions the house may qualify for mortgage interest deduction for up to two years after leaving the house

Renting out the house

Temporary renting out the house:

  • If the house is rented out temporarily, for instance during holidays (such as Airbnb), the house remains in Box I and the mortgage interest remains deductible, please be informed that local regulations may apply depending on the municipality
  • 70% of the rental income is subject to tax in Box I, the direct costs for rent are also deductible, please be informed that local taxes may apply depending on the municipality

Room rental exemption:

  • If part of the house is rented out and this part is not considered as an independent house and the rent is below € 5,506 per annum, the house remains fully in Box I (and thus no impact or limitation on the mortgage interest deduction)
  • The rent is tax free

None of the above:

  • The tax treatment strongly depends on the specific circumstances
  • If a designated part of the house is rented out for a longer period, such as a room (whilst exceeding the amount for the room rental exemption) or floor, this may be considered as a Box III tax treatment. As such, the part used by the owner remains Box I and the rented part is considered as Box III. Part of the house is subject to Box I treatment (mortgage interest deduction) and part is subject to Box III treatment (rent tax free no mortgage interest deduction, net asset value taxable)
  • If rooms or more designated parts of the house are rented out for brief periods this may be categorized as a Box I treatment (income from other activities). The tax treatment is not clear on this

(ii) House as investment property

Basic tax treatment

• The house is taxable in Box III.
• In Box III the value of the house is reported. Value reduction rules apply if the house is rented out whilst rental protection rules apply. This goes according to below schedule:

Rent as percentage of the WOZ value:

From To Reduced value ratio
0%  1% € 45%
1%  2% € 51%
2%  3% € 56%
3%  4% € 62%
4%  5% € 67%
5%  6% € 73%
6%  7% € 78%
7%  – € 85%

 

  • If ground interest (“erfpacht”) applies, the 17-fold of the annual amount is (also) considered as value decreasing factor and as such deductible from the WOZ value
  • In 2020, the loan is deductible in Box III as a debt
  • Actual rental income is not taxable whereas costs are also not tax deductible
  • The Netherlands does not levy capital gains tax when selling real estate that belonged to Box III

Proposed changes as per January 1, 2022 for investment properties (and other investments)

It is expected that before the summer of 2020 the Dutch Minister of Finance will present a bill to amend the taxation of income from savings and investments in Box 3. The reason for this amendment is prompted by the fall in interest rates on savings accounts in recent years and the subsequent widely felt need in society to align the taxation on savings and investments with the actual return on investments earned by individual taxpayers. The proposal would use the actual ratio between a taxpayer’s savings, investments, and debts.

For investment properties, the proposed changes as per 2022 will have a major impact for the following reasons:

  1. The WOZ value in rented state (as per the table above) will be taxed at 5.33%
  2. The debt can no longer be deducted from the WOZ-value for the full value of the debt, it can only be deducted at an average interest rate of 3.03%
  3. You may further reduce that amount with € 400 or € 800 depending on your marital status (single or couple) as a general income deduction
  4. The remaining net asset value will be taxed at 33%

Example

  • Government assessed value (WOZ value) of your property: € 500,000
  • Tax value in rented state (assuming at least 7% return on WOZ value = 85%): € 425,000
  • Mortgage: € 450,000

In 2020 you are allowed to deduct the value of the debt from the value of the property in rented state. This results in a nil amount to be subject to taxation in box III.

In 2022 only if and when the suggested amendments become effective the result will be as follows:

  • Tax value in rented state (assuming at least 7% return on WOZ value = 85%): € 425,000 x 5.33% = € 22,653
  • Mortgage: € 450,000 * 3.03% = – € 13,635
  • Reduction for a couple = – € 800
  • Taxable deemed income: € 8,218
  • Net tax: € 8,218 x 33% = € 2,712

As you can see, when the suggested amendments come into force, it may have a big impact on your investments, even or especially when they are financed (partly) with a loan. Compared to 2020 this could even lead to a tax liability in 2022 whereas this wasn’t applicable in 2020. At this stage, these amendments are still in the proposal phase and there is no guarantee that these amendments will come into force. We will keep you updated in this respect.

Final notes

  • Some tax payers may be subject to a foreign tax regime, such as US nationals or non-residents of the Netherlands. Please bear in mind that, besides the Dutch treatment, it is recommendable that advise is obtained to understand that tax implications. This mostly applies to real estate held as an investment, such as rental income of capital gains taxation. The Dutch tax treatment is generous in most cases, but such benefit may be absorbed by the tax regime and the tax treaty that may not allow for an exemption of that income but rather apply a foreign tax credit regime for the avoidance of double tax.