The taxation of income from main residence

Almost every person in the Netherlands who owns a house which functions as the main residence for this person and/or people belonging to his/her household is deemed to earn income from this house.

The taxpayer owning a main residence must report a deemed amount of income in his/her annual income tax return (a percentage of the value), but is also allowed to deduct certain expenses of this deemed income, such as the mortgage interest paid. For most people the main residence provides for an overall tax deduction/tax refund.

What qualifies as ownership of a main residence?

Ownership includes legal ownership, but also covers economic ownership and certain similar rights, such as a usufruct. Also the membership of a cooperation can constitute deemed ownership. The taxpayer or his/her partner should enjoy the benefits of the house and bear the burden and expenses.  

A main residence can under certain circumstances include (part of a) a ship or trailer. A rented property does not qualify as a main residence. Taxpayers who rent or lease a property are not obliged to report any income in lieu of their residence (or deduct expenses in relation to this lease/rent). 

When does the qualification as main residence start and when does it end?

The date of registration at the Dutch city hall is in most cases decisive for the start and the end of the fiscal qualification as main residence, unless registration with the city hall is not possible or if partners have separate main residences.

The use as a main residence

If a taxpayer owns more than one house, or if a taxpayer stays in more than one place, the question can arise which property qualifies as his/her main residence.

The criterion provided by the Dutch Income Tax Act is that the house should be, other than on a temporary basis, at the disposal of the taxpayer or people belonging to his/her household as a main residence.

In most cases the actual level of use and stay will be decisive; where do the taxpayer and his/her family stay most of the time?

The law provides for a number of exceptions if the actual living in the house is interrupted or is not possible due to external circumstances. The following situations are covered under which the house still/already/also qualifies as main residence:

• Vacancy because the house is for sale: the house must have functioned as a main residence in the calendar year or in the three previous calendar years and the taxpayer must have the intention to sell the house. Temporary rent is allowed, but results in income from saving and investments for the duration of the house being rented out (no qualification as main residence)
• Vacancy because of acquisition or construction: the taxpayer must prove that he/she has the intention to use the house as a main residence within the calendar year or the next three years.
• No stay because of divorce or separation: in case a house does no longer qualify as a main residence for the taxpayer, but it does for its former spouse/partner, the house can under certain circumstances still qualify as a main residence for a maximum period of two years.
• No stay because of admission to nursing home or care facility: if a taxpayer is admitted to a nursing home or care facility for medical reasons or for reason of old age, the house can under certain conditions still qualify as a main residence for a maximum period of two years.
• No stay because of temporary assignment abroad: if a taxpayer is temporarily assigned abroad, and he/she owns a house in the Netherlands which was his/her main residence for at least one year before the start of the assignment, and the stay becomes incidental because of the assignment, then the house can under certain conditions still qualify as a main residence, provided that it is not put to the disposal of third parties (kept empty), and the taxpayer or his spouse is not deemed to earn income from another main residence abroad.

The temporary rent of a main residence does not necessarily mean that the house no longer qualifies as main residence. Under circumstances the annual income to be reported is then to be increased with 70% of rent revenues. 

If a taxpayer and his/her partner have separate houses which could both qualify as main residence, the taxpayer and his/her partner can mutually elect in their income tax returns which house is to be treated as a main residence for the levy of Dutch income tax. This election is irreversible, and if no election is made, none of the houses will qualify as main residence.

Non-qualified part of the main residence

A main residence does not include an independent part of a house which is used:

• in a business of the taxpayer or persons belonging to his/her household for which use an amount for the use is deducted from the profits of the business, or
• for the generation of other taxable income of the taxpayer or persons belonging to his/her household for which use an amount is deducted from the other income, or
• by a corporation in which the taxpayer or persons belonging to his/her household have a substantial interest and for which use an amount is deducted from the profits of this corporation.

The annual income to be reported for the main residence 

The annual income to be reported as income from main residence (in Dutch: "eigen woning") can be calculated as follows (2021):

The value equals the value which has been determined on the basis of the Law on Valuation Real Property (in Dutch: “Wet waardering onroerende zaken” or “WOZ”). The house owner receives a Decree annually from the municipality in which this value is stated (in Dutch: “WOZ-beschikking”). 

For houses that are vacant because of acquisition, construction or anticipated sale no income needs to be reported.

If a main residence is temporary rented out, the annual income to be reported is to be increased with 70% of rent revenues.

The reduction for a limited mortgage

The house owner who finances his house with own means (so limited mortgage) is entitled to an incentive in the form of an extra tax deduction. Please note that the Dutch government is gradually decreasing this additional tax deduction over a period of 30 years to eventually nil, started in 2019.

This extra deduction equals the difference between the income to be imputed (see table above) less the tax deductible expenses (see below). The net annual income to be reported can thus effectively be reduced to nil.

The tax exemption for room rental

If a taxpayer rents out a room in his/her house which qualifies as a main residence to a third party (furnished or not), the rent will not be subject to any tax if the total amount of annual rent does not exceed € 5,668 per year (2021).

For this exemption to apply, it is required that both the house owner (for whom the house qualifies as a main residence) and the person who rents the room are registered as inhabitants at the city hall.  

The life insurance for the mortgage

It was common practice (untill 1/1/2013)  that a bank which provides a mortgage loan for the acquisition of a main residence, demanded that also a life insurance be concluded.

What typically happened is that the borrower (the taxpayer) took out an insurance on his own life which gives entitlement to a lump sum amount in the event of decease of the borrower. This lump sum amount does not come to the disposal of the taxpayer, but must be used for the (partial) redemption of the mortgage loan. It is in fact an extra security for the bank.

Under the normal tax regime, the “profit” (lump sum amount less contributed premiums) realized upon expiration or earlier cancellation of the policy is taxed in Box 3 as income from savings and investments. The premiums are not tax deductible.

Under certain conditions, a special regime applies and the “profit” realized upon expiration/ cancellation of the insurance is tax exempt to a certain amount. For 2021 the lump sum may not exceed €171,000. Various other conditions apply for the application of this special regime, such as that on the life insurance policy it should be stated that it is a capital for own house (in Dutch: “Kapitaalverzekering Eigen Woning” or “KEW”).

Also if the special regime applies, the premiums paid are not tax deductible. 

The deduction of expenses

Not all expenses relating to a qualifying main residence are tax deductible, but in any case the interest paid on a (qualifying) mortgage and certain costs for obtaining the mortgage to finance the house, are usually tax deductible.

There are two important limitations for the tax deduction of expenses.

The first one is linked to the duration of the mortgage: only the expenses relating to the first 30 years of the mortgage are deductible.

The second limitation is more important and relates to the profit made on an a main residence in the preceding 3 years. When a house owner sells his/her main residence with a profit (in essence sale price less value outstanding mortgage), the profit must be reduced from the (100%) mortgage (i.e. non-qualification of tax deduction expenses allocable to this “excessive” part of the mortgage) for a new house acquired within the succeeding 3 years. This is an incentive for the house owner to re-invest his/her profit into the new main residence. Various specific conditions apply.

In most cases where the acquisition of a house or a house renovation is financed with a loan (from the bank), the income from primary residence is negative, meaning that effectively a deduction is allowed on the income from employment, business income and other income in Box 1.

For most people in the Netherlands (in particular those who only receive income from employment) the tax deduction of mortgage expenses results in a tax refund. This tax refund can be applied for in advance so that monthly tax refunds can be received during the year or at once when the assessment is levied on the basis of the annual income tax return filed.

The following expenses are in general tax deductible:

1. Public notary fee for drafting the mortgage deed, including VAT;
2. Mortgage interest for the acquisition or the renovation of the house;
3. Fee for real estate valuation for obtaining the mortgage;
4. Periodical lease payments (“erfpachtcanon”);
5. Bank fee for the arrangement or extension of the mortgage;
6. Penalty interest in case of early redemption of the mortgage;
7. Costs in relation to the application for the National Mortgage Guarantee (“Nationale Hypotheek Garantie“);
8. Interest for extension (“uitstelrente”);
9. Construction interest (“bouwrente”) after the conclusion of the provisional purchage/contracting agreement;
10. Commitment fee (“bereidstellingsprovisie”);
11. Premiums for qualifying disability insurance (“WAO verzekering”);
12. Costs of architectural inspection in relation to obtaining the mortgage and/or the National Mortgage Guarantee.

The following expenses are in general not tax deductible:

• Acquisition price real estate or contract price in case of development;
• Transfer price tangible assets (such as furniture, etc.);
• The real estate transfer tax and VAT;
• Costs of renovation and maintenance;
• Real estate broker fee;
• Cost of bank guarantee;
• Construction interest ("bouwrente") before the conclusion of the provisional purchase/contracting agreement;
• Lump sum lease (“erfpacht”) payments;
• Public notary fee for certificate of ownership and registration in the real estate cadaster.

The interest expenses in relation to the financing of the following items are in general tax deductible:

• Acquisition price real estate or contract price in case of development;
• Public notary fee for certificate of ownership and registration in the real estate cadaster;
• Public notary fee for drafting the mortgage deed;
• The real estate transfer tax;
• Cost of renovation;
• Real estate broker fees;
• Fee for real estate valuation for the mortgage;
• Lumpsum lease (“erfpacht”) payments;
• Bank fee for the arrangement or extension of the mortgage;
• Costs in relation to the application for the National Mortgage Guarantee (“Nationale Hypotheek Garantie“);
• Interest compensation for constructor during construction;
• Commitment fee (“bereidstellingsprovisie”);
• Cost of architectural inspection in relation to obtaining the mortgage and/or the National Mortgage Guarantee.

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