When is a house considered your main residence and what expenses can be claimed on your personal tax return? What options do you have when you purchase a new house before you have sold your old one? The professionals from Taxsight walk you through the concept of main residence in the Netherlands, and how it affects your income tax.
The Dutch tax system for individuals is split into "boxes". There are three types of boxes:
- Box 1: Taxable income from (freelance / employment) work, and main residence
- Box 2: Taxable income from a substantial interest (5% or more shares in a BV or equivalent company)
- Box 3: Taxable income from savings and investments and debts which are not considered part of Box 1 or 2
What counts as a main residence?
A house that you own and use as your main residence is considered a Box 1 asset. If the Box 1 house is financed with a mortgage, which meets the mortgage requirements (see below), the owner can claim the interest in their tax return.
The purchase expenses are also partly deductible. Normally, expenses that are related to the mortgage are deductible while others not. These are for example expenses incurred to acquire the mortgage, the fee paid to the mortgage advisor and notary expenses related to the registration of the mortgage.
Which mortgages qualify for interest deduction?
A mortgage qualifies for an interest deduction (Box 1) so long as:
- You are using the mortgage to buy a home to live in
- You are repaying your mortgage on a linear or annuity basis over a period of 30 years
Both annuity and linear mortgages involve paying off a certain amount each year. This is decided with your bank or lender in advance. An annuity mortgage starts with lower payment amounts and higher interest rates, with annual repayment increases, while a linear mortgage has a fixed repayment rate.
The fixed sum home valuation
However, you should also know that the notional value of your owner-occupied home (the "fixed sum" or eigen woning forfeit in Dutch) is considered as income in Box 1. This fixed sum is calculated based on your property value (WOZ value in the Netherlands). The fixed sum is 0,35% of the WOZ value for houses worth between 75.000 euros and 1.200.000 euros, and 2,35% for houses worth more than 1.200.000 euros.
Mortgage interest
Homeowners whose annual mortgage interest payments are higher than the calculated fixed sum can still save money by deducting their mortgage interest in their tax return. On the other hand, homeowners whose fixed sum is higher than their mortgage interest payments will face additional Box 1 taxation. The fixed sum is generally greater than the mortgage interest if, for example, a person has paid off a major part of their mortgage and pays a low interest rate, or owns their home without a mortgage.
For those whose fixed sum is greater than their mortgage interest payments, taxation is calculated by dividing the full fixed sum by 30 and multiplying by the taxation value for that year. When this taxation was first reintroduced in 2019, this value was 1, and by 2049 it will rise to 30. In 2023, the value is 5.
It's easiest to illustrate this with an example. If someone's home is given a WOZ value of 500.000 euros, the fixed sum (0,35% of the value) would be 1.750 euros. To calculate the taxation amount in 2023, this is divided by 30 and multiplied by 5 to give the taxable amount of 291 euros. This amount is taxed against the applicable tax rates in Box 1.
Getting a refund on your tax bill
As mentioned above, the interest paid on mortgages, along with certain house purchase expenses, are deductible if they are higher than the house's fixed sum. Deducting these expenses allows you to reduce your Box 1 tax bill.
If you are in employment and are subject to payroll taxation - where taxes are automatically deducted from your salary as an advance tax - the annual mortgage interest deduction, along with purchase expenses, could mean that some of your payroll taxes are refunded at the end of the tax year.
What is more, the deduction is no longer refunded against the highest tax rate of around 50%. This was beneficial for people who earn income at the highest tax rate. The maximum deduction has been reduced in phases since 2014 and in 2023 is against the lower tax rate - which is now 36,93%.
Moving house
Dutch tax law offers also solutions if you purchase a new house as your main residence, before your old one has sold. A special ruling allows you to declare both properties in Box 1. This applies for a maximum of three years, plus the year of purchase, provided that your old house is empty and for sale.
The ruling also applies if you temporarily remain living in your old (rented or owned) house while your new house is empty and at your disposal. This could be during renovation works, for instance. You can benefit from this ruling for a maximum of three years, plus the year of purchase.
The benefit of this ruling is that you would not face Box 3 taxation regarding the house - which otherwise as a second property would be considered an asset, rather than your main residence - and it allows you to claim, if applicable, mortgage interest on both houses in Box 1 during this period.
Provisional income tax refund
When you have purchased your main residence house, you have the option to apply directly for the monthly refund for the mortgage interest deduction and the purchase expenses. This refund will be based on an estimation for the year and paid out in monthly instalments throughout the year. In subsequent years, the refund related to the mortgage interest can also be claimed on monthly basis.
The final refund will be eventually calculated and balanced when filing the tax return for the applicable year. For the request, a separate provisional tax filing should be carried out.
Transfer tax
The transfer tax is a one-time taxation at purchase and does not make up part of this article. If applicable, it is paid directly to the tax office at the notary when purchasing the property.
Do you have questions about property and taxes in the Netherlands and require assistance? The advisors from Taxsight are experienced in helping clients with local and international tax matters. They can provide expert guidance and advice on all things tax-related.