An article by Arnold Waal - CEO at OrangeTax
These days it is common to make a capital gain selling your home. One of the upsides of the Dutch tax system: no capital gain tax. But there are conditions.
Capital gain selling your home
Selling your home is a fortunate event these days, purchasing a home is a nightmare. Both are very much in balance. The fortunate part: the asking price is being overbid. The nightmare part: you need to overbid the asking price in order to be able to purchase.
At our home we have the best constructor for setting the tiles. He told me he sold his house with the same profit he had to overbid the house he purchased. Basically he has a bigger house for the same monthly costs.
No capital gain tax?
Indeed, in the Netherlands there is no capital gain tax for private individuals. That is also the reason why nearly no company purchases a home. A company selling such a home is subject to capital gain tax. In some countries there is a tax advantage to purchase property in a vehicle, not in the Netherlands.
That said, in this housing market where the employee cannot afford the purchase of the house, the employer helps. We now see employers actually purchasing a property in the name of the company to house the employee. The advantage for the employee is that the rent being charged by the employer cannot exceed 18% of the annual salary. Free tax advising bonus material!
What are the conditions?
The Dutch Government learned from their mistakes. In the past there were no conditions, so you had your house financed for 100%. Actually 120%, as in those days you could finance also the purchase costs. You sold the house, made a gain, purchased the Porsche with the gain and financed the next house for the full amount again. Now there are rules. The rule is that you need to invest the gain made in your next house, that is your main residence. The penalty for not doing so, is that you cannot deduct the mortgage interest for the part of the mortgage you took out too much.
You purchased for EUR 350.000 your home 10 years ago, 100% financed. You paid back on this loan EUR 120.000, hence today the loan on the house is EUR 230.000. You sold the house for EUR 550.000 and you purchased the next house for EUR 650.000. You took out a EUR 650.000 loan for the next house. The capital gain is EUR 550.000 minus EUR 230.000 remainder loan is EUR 320.000. That implies that for the next house costing EUR 650.000, you can only take out a tax deductible loan of EUR 650.000 minus EUR 320.000 gain is EUR 330.000. In your tax return EUR 330.000 loan for the house is tax deductible and EUR 320.000 is not.
The above example is a rough example. Some non-deductible costs influence the capital gain in a lower amount. Plus most people want a new bathroom and kitchen in the next home, these refurbishments are taken from the capital gain amount if no loan was taken out for these costs. You need a professional mortgage advisor, as you can find with expat mortgages. During the intake they explain you how the possible gain of your current home is taken into account in the finance report of the house you would like to purchase.
It is good or bad, this condition?
It depends who you ask. My experience is that the man is eager to purchase the Porsche while the woman is more relaxed with less mortgage debt. I can related to both the man and the woman. The Porsche as you do not know how long your life will last, not sure if a fast car influences this period. On the other hand, if economics get worse, a low debt is handy.
Tax is exciting
We think tax is exciting. Accurately calculating the capital gain to be invested in the next home is what our team get excited about. This is a service that is part of the tax return filing service. Want advice? Find information about our services on our website.