These days, it is common to make a capital gain when selling your home. Did you know that one of the upsides of the Dutch tax system is that there is no capital gains tax? There are some conditions, however. Arnold Waal from Tax is Exciting explains.
Capital gain when selling your homeSelling your home is a fortunate event these days – purchasing a home, however, can be a nightmare. The fortunate part: potential buyers will bid over the asking price. The nightmare part: you will need to overbid the asking price in order to be able to purchase a new home. Both are very much in balance, though.
For example, my contractor told me he sold his house with the same profit he had to overbid the house he purchased. Basically, he now has a bigger house for the same monthly costs.
No capital gains tax?Indeed, in the Netherlands there is no capital gains 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 gains tax. That said, in this housing market, where the employee cannot afford the purchase of a house, the employer often helps. We now see employers actually purchasing a property in the name of the company to house their employee. The advantage for the employee is that the rent being charged by the employer cannot exceed 18 percent of their annual salary.
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 percent. Actually, 120 percent, as in those days, you could finance the purchase costs as well. You sold the house, made a profit, purchased a Porsche with the profits and financed the next house for the full amount again.
Now, there are conditions. The rule is that you need to invest the gains made into your next house, which is your main residence. The penalty for not doing so is that you cannot deduct the mortgage interest for the part of the extra mortgage you took out.
Example condition capital gains taxHere is an example. You purchased your home 10 years ago for 350.000 euros, 100 percent financed. You paid back 120.000 euros on this loan, hence today the loan on the house is 230.000 euros.
You then sold the house for 550.000 euros, and you purchased the next house for 650.000 euros. You took out a 650.000 euros loan for the next house. The capital gain is 550.000 euros minus the 230.000 euros remainder loan, totalling 320.000 euros.
That implies that for the next house costing 650.000 euros, you can only take out a tax deductible loan of 650.000 euros minus the 320.000 euros gain, which is 330.000 euros. In your tax return, the 330.000 euros for the house is tax deductible, while the 320.000 euros is not.
Fine tuningThe above example is a rough example. Some non-deductible costs influence the capital gain in a lower amount. Plus, most people want to install a new bathroom and kitchen in their next home – these refurbishments are taken from the capital gains amount if no loan was taken out for these costs.
It is good or bad, this condition?It depends on who you ask. My experience is that someone will be eager to purchase a Porsche while another will be more relaxed when they have less mortgage debt. I can relate to both; the Porsche, as you do not know how long your life will last (not sure if a fast car will influence this…), and on the other hand, if the economy gets worse, a low debt will be handy.
Accurately calculating the capital gain to be invested in your next home is what the Tax is Exciting team gets excited about. It’s also a service they offer as part of their tax return filing service! Contact Tax is Exciting now with questions about all things tax, including capital gains.