Tax implications of buying a home in the Netherlands

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The process of purchasing your own home, is difficult enough when considering all your notarial and legal obligations. But in terms of the tax implications, these do not make it any easier. From the moment one starts this process they are bombarded with these stipulations. To then also hear that this new home will also be a substantial part of your annual income tax return, can be fairly daunting.

That is why we at Expat Service has outlined all tax consequences of purchasing your own home, below. This way you are fully prepared for any tax implications of making this huge personal step.

Benefits of owning your primary residence in the Netherlands

Let start with the more enjoyable aspect of owning your own home in the Netherlands, which are the tax benefits. Purchasing your own home in the Netherlands has a lot of different advantages, especially in the year in which you purchase this home. These benefits come, mainly, in the form of tax deductions. Tax deductions are certain costs that you are allowed to deduct from your taxable income. This lowers your taxable income, and therefore also lowers the amount of taxes due, because, for tax purposes, you have a lower income.

This creates huge tax benefits, especially for those who pay their taxes provisionally throughout the year, such as people in employment. These people have already paid taxes based on their full income, so by lowering it for tax purposes, they create the much sought after tax refund.

The main tax deduction resulting from having your own home is the so called: mortgage interest deduction. A common misconception regarding this tax benefit is that this is some refund of the interest you paid. This is not the case.

What actually happens is what is described above. You pay interest, which you may deduct form your taxable income, which results in a lower amount of taxes to be paid overall. In the case that you already paid your taxes provisionally (because your employer may withhold these), you create a refund of already paid tax. This distinction is important to keep in mind, as everyone with a mortgage pays interest, but not all of those will have taxes provisionally withheld (think of people with their own business for instance). Therefore, the mortgage interest deduction is a tax benefit, not a guaranteed tax refund.

In the year you buy your home, there will be additional tax deductions. This is because besides the mortgage interest, any costs related to you getting your mortgage are also deductible. We call these ‘financing costs’. Usually these are all mentioned on the notary overview, which is a sort of summary of the purchase of the home. All costs made with the notary, the mortgage provider as well as the actual purchase of the home are included on this overview. It is therefore also vital to save this overview, as this will be a necessary document for your income tax return.

Some examples for these costs are the fee you pay your mortgage advisor, the costs related to the deed of the mortgage, the national mortgage guarantee (NHG) and the costs for having a translator present during the proceedings, if such a translator is necessary.

What to know about owning your primary residence

There are also a few, less fun aspects of the tax consequences of having your own home.

First of which is the fact that, in order to mitigate some of the benefit you receive form having your own home, you are obligated to report a small income resulting from this home, based on its WOZ-value. The percentage of the WOZ-value that needs to be taken into account can vary, however if the value of your home is between € 75.000 and € 1.330.000, then this income will be 0,35% of this value. Since it is such a small percentage, it will usually have very little impact, but it is still important to keep in mind, for those with no or a very small mortgage remaining.
Besides this income, you will need to be aware of the tax implications of selling your own residence. Don’t worry, you are not directly taxed, within the income tax, on the potential profit of the sale of your own home, but this potential profit does need to be taken into account.

When you sell your own home, the difference between your sale price and the outstanding mortgage is seen as profit. This profit needs to be re-invested into your next primary residence, if you want to fully benefit from the mortgage interest deduction for that new property.

A small example would be the following: Say you sell your home for € 500.000, with a remaining mortgage of € 350.000, making your profit € 150.000. Your next home costs € 600.000. Due to the profit from your last home, you can only get a mortgage on your new home for € 450.000, if you want to fully deduct the interest on this new mortgage.

If you do not, then a correction will be made within your income tax, to limit the effectiveness of the mortgage interest deduction, in order to equal it to if you did reinvest the full profit. The government basically wants to prevent situations, where people sell their homes with tremendous profits (that is not directly taxed in the income tax), and then get a new property, with a full mortgage (meaning high-deductible interest) and pocketing the profit. Therefore, this limitation is imposed.

Help with tax return

At Expat Service, we can guide you through the elaborate legislation regarding your own home as well as help you with the proper reporting. Whether it is a provisional or definitive tax return, we can make sure that your own home is both reported properly and as beneficial as possible.