If you took out a mortgage or other loan to fund the purchase, maintenance or improvement of an owner-occupied property the related interest and charges will qualify as deductible expenses of an owner-occupied property in Box 1. These expenses can be deducted over a maximum period of 30 years, which is the most common term of a mortgage. If you took out the loan before 1 January 2001, the 30-year period commences on 1 January 2001.
Consumer loan rule
If you sell your owner-occupied property and buy another property in 2007, this may affect the deductibility of the (mortgage) interest. This is because you have to take the surplus value of the property sold into account when calculating the amount of outstanding mortgage on the property – i.e., the amount of the principal sum on which the interest is tax deductible – in respect of the new property.
The surplus value is the difference between the sale proceeds and the debt on the property sold. This amount is known as the net revenue from the sale of an owner-occupied property. The amount of outstanding mortgage on the new property cannot exceed the purchase price of the new property minus the net revenue from the sale of the old property.
If you do not use the entire surplus value to finance the new property, you may not deduct all the interest and charges. The interest and charges relating to the unused part of the surplus value – the additional amount borrowed – will not be deductible. This part of the loan qualifies as a consumer loan and falls in Box 3.
If you buy a cheaper property, you may still declare the old amount of outstanding mortgage on the old property for an amount not exceeding the purchase price of the new property. The consumer loan rule does not apply to home owners who, before 1 January 2004: entered into an irreversible obligation to sell their owner-occupied property; or purchased a new owner-occupied property.
In all cases, there should be definite contracts of purchase and sale that are binding on the parties involved. However, such contracts may contain the customary dissolving clause, such as a financing arrangement clause.
The purchase price of your new property amounts to € 200,000. The acquisition costs (the property transfer tax and the notary’s and estate agent’s fees) amount to € 18,000. The total purchase costs of the property will then be € 218,000.
The sale proceeds of your old property are € 147,000. The amount of outstanding mortgage amounts to € 109,000 at the time of the sale. The surplus value will then be € 147,000 – € 109,000 = € 38,000 (the net revenue from the sale of the property). In that case, the maximum amount of outstanding mortgage on your new property will be € 218,000 – € 38,000 = € 180,000.
If you take out a higher mortgage, the interest on the part in excess of € 180,000 will not be deductible.
Lowering the mortgage.
Often it’s possible to lower the mortgage with a certain amount on a yearly basis. Often this is percentage of 10% tot 20% of the original loan. Reason to do so is to lower the mortgage-costs or using own money to invest in real estate. Be aware that if you would like to raise the mortgage again in a later stage, with the same amount you lowered the mortgage earlier, the intrest on this “new” mortgage is not tax-deductable anymore. This said it might be a good idea to ask for advise. Please contact us. We will be glad to help.