Temporary rental of your property

Tax deductions

As most home owners are very aware, mortgage interest rates are a major tax deduction. For those of us who are unlucky enough to pay tax, we get quite a bit of tax back when we have a mortgage to pay.

Yet if you rent out your home, you will lose the entitlement to any tax deduction related to the property. However, the government has decided to give the housing market an additional boost. From 1st January 2010 it will be possible to rent out your property temporarily and when the tenant leaves, the entitlement to tax deduction will return. This will last until 2012 and will also be applicable to houses that were rented out in 2008 and 2009.

If you have two properties

If you bought a new property whilst your old house was still for sale, you will temporarily have double mortgage payments to make. In the Dutch Tax Law there is a specific clause for this. From the moment that you put up your house for sale, you can deduct the mortgage interest of both properties for the remainder of the calendar year and another full two years.

Example: John Brown has bought a new property on 1st September of this year and his old house is for sale. John may now deduct the mortgage interest on both properties until 1st January 2012.

Solution: temporary rental

If you have the possibility of temporarily renting the property that is for sale, you will face a dilemma. If you rent out the property, you will lose the right to deduct the mortgage interest for this property and also the fictitious surplus value of your old home could affect the tax deductibility of your new home’s mortgage interest.

Example: John Brown has found a temporary tenant for his old house for a period of six months. He doubts whether or not he should accept this tenant. If he rents out the property he can no longer deduct the mortgage interest, not even after the tenant leaves and the house is not yet sold. On top of that, the rental will be considered a fictitious sale from a tax point of view. This would mean that his bridging loan is no longer tax deductible and the surplus (fictitious) value will be taxed in box III.

What is the solution?

To find a solution for these negative results, the tax authorities have announced a new measure for temporary rental for houses which are for sale. From 1st January 2010 a house that is for sale may be rented out on a temporary basis and once the tenant leaves, the old tax deductibility of the interest rate will return. Also the temporary rental will not be considered a fictitious sale (or estrangement). However, you should also check with your mortgage bank if they will give permission for the temporary rental. In the current market the banks are more cooperative, but it's better to ask.

Example: John can now rent out the property temporarily. During this period the house moves to tax box III. The mortgage interest is not tax deductible during the rental period, but the mortgage debt reduces any assets in box III. If there is a bridging loan, the interest rate remains tax deductible. If after the six months in this example, the tenant leaves and the house is not yet sold, the mortgage interest of the old house will be deductible again until 1st January 2012. This temporary measure will become effective from 1st January 2010 and is applicable to houses that were rented out in 2008 and 2009.

Article by de Boer Financial Consultants. For financial advice when moving to the Netherlands, contact +31 (0)70 511 8788.

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