HR may have to consider assessing their expat policies to take into account a new loan regulation which could significantly limit the deduction of the mortgage interest upon the purchase of a new house in Holland. Arjan Hovenkamp of Deloitte explains.

The Dutch Lower Chamber has decided on an important supplementary regulation with respect to the private home and the mortgage interest relief. This new regulation, the “bijleenregeling” (additional loan regulation), which has been effective since 1 January 2004, should encourage the taxpayer to use the sales proceeds from the sale of the private home to finance a new private home. The result could considerably limit the deduction of the mortgage interest upon the purchase of a new house.

What exactly is the “bijleenregeling”?

The “bijleenregeling” is part of the private home regulation can best be illustrated with a simple example.

Let’s assume that in the past the taxpayer purchased a house for EUR 150,000, a purchase he fully financed. The taxpayer moves to a new house with a value of EUR 320,000, selling his old house for EUR 260,000. The taxpayer also wants to fully finance his new house.

As a result of the new "bijleenregeling", the taxpayer is expected to use the entire sales proceeds of his first house for the purchase of the new house. Whether the taxpayer actually does this is irrelevant. The sales proceeds of the old house are determined by deducting the mortgage on the old house (and therefore not the original purchase price of that house) from the sale price of the house. The sales proceeds in this case are EUR 110,000. We note that these are net sales proceeds. Any sale costs can therefore be deducted from the sales price. The net sales proceeds form the so-called "private home reserve".

Since the sales proceeds of the first house are deemed to be invested in the purchase of the new house, the taxpayer cannot deduct the mortgage interest over the entire financed amount. Of the financed amount of EUR 320,000, only the mortgage interest over EUR 210,000 is deductible in Box 1(taxation on employment income and income from principal residence). Thus, the paid mortgage interest over EUR 110,000 (the sales proceeds of the old house) cannot be deducted. This part of the debt however, can be deducted from the yield base in Box 3 (income on savings and investments).

We note that the term for a private home reserve is five years. Therefore, if the taxpayer in the example does not immediately buy a new house, but does so after three years, he will still have to take into account the private home reserve that was formed after he sold his old house.

The "bijleenregeling" broadly defines the terms 'sale' and 'purchase' of a house. In easy terms, if a house can no longer be considered a private home, it is deemed to have been sold. As a result, it must be determined to what extent a sales benefit, and, along with that, a private home reserve has arisen. A house that is currently being let by a taxpayer, and which he himself subsequently moves into, is deemed to have been purchased by the taxpayer.

The consequences of the "bijleenregeling" can be far-reaching if a taxpayer moves into a new private home after 1 January 2004, or sells his old house. These consequences can also occur when a taxpayer works abroad for a certain period and lets his private home in the Netherlands for the duration of that period.

If a sale or purchase of the private home took place before 1 January 2004, the "bijleenregeling" does not apply. Therefore the “bijleenregeling” does not apply to a house that did not qualify as private home before 1 January 2004 because, for example, it was let to third parties. HR may have to consider assessing Expat policies for the consequences of this regulation.

Please note that the above explanation is not exhaustive. The regulation contains a number of specific conditions. If you have any further queries about this regulation, you can contact your own Deloitte adviser.

Arjan Hovenkamp is a manager in the Deloitte expatriate services practice in Amsterdam. He can be reached at 00 31 20 5825856 or ahovenkamp@deloitte.nl.