Dutch Taxes – Part 6: Real Estate

We have previously covered the basics with regards to Dutch taxes, which you can find here. Real estate investing is, however, going to complicate things a bit further. However, it also provides some opportunities to lower you tax burden if you understand the (current) rules. The following is critical to realise (considering the same property and about the same cash flow). So today: Dutch Taxes – Part 6: Real Estate

Actively Investing in Real Estate

If you actively manage your own investment portfolio (e.g. (DIY) maintenance, rent collection, tenant screening and selection, etc.) the income from your real estate is considered “income” and is allocated in Box 1. You will be taxed on 100% of the net profits (i.e. income minus expenses) for long term rentals (6 months+).

The lowest tax bracket within Box 1 is 36.55% at this time (this is social premiums and taxes combined). For long term rentals you will thus effectively be paying a minimum of about 36.55% taxes (100% * 36.55%) on your net profits. However, if you earn a decent income and you are in the 52% tax bracket, you pay a lot more at 52% (100% * 52%). Ouch….

Short term rentals

If you plan to rent our a room or your whole house/apartment via AirBnB (or equivalent), you are still considered by the government as “actively working” to get income. In short, you have to file income you make from AirBnB as income in Box 1. You may deduct expenses such as cleaning cost, washing, electricity, etc. from the rental income. The good thing for these short term rentals is that will be required to add only 70% of your net income to your income taxes under Box 1. If you keep the income to below about €20K per year, you effective tax load is about 25,5% (70% * 36,55%).

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Dutch Taxes – Part 6: Real Estate

Passively Investing in Real Estate

You can have an property management company look after the property/properties for you (incl. maintenance). In this case you won’t perform “work” from a tax perspective. So your real estate ventures, are considered in Box 3. Yes, you pay a fair amount of money for these management firms! But it does provide some tax advantages and it also provides risk management and peace of mind. Is it worth it? Let’s see.

Currently the good thing for real estate in Box 3 is that you are taxed on net wealth (i.e. assessment in rented state value minus mortgage/loans). If you make about 4% on the property value after costs (this includes the cost for property management, mortgage, maintenance, etc.). Your effective tax rate of only 9%, that is a lot more reasonable than as noted above for Box 1 taxation!

An example

  • Your property is worth €250.000
  • Your property is worth in rented state 200.000 (assessed WOZ value *85%)
  • The mortgage is €140.000
  • Your wealth for taxation is considered at €60.000
  • Yearly taxation (assuming your net wealth in Box 3 is between €25.000 and €1.000.000, the tax man assumed 4% return and 30% taxation on that assumed return) is €720
  • With 4% ROI (net, so after all costs including those for management) on property value, your yearly income will be: €10.000. (Based on your actual investment the ROI is actually 11%)
  • Effective taxation in Box 3:  7.2%

Discussion Passively Investing

Contrary to “active real estate investing” in Box 1, in Box 3 you are not able to deduct any expenses (e.g. maintenance, property management fees, etc.). This because the taxation is done only on an assumed rate of return on your net wealth.

Before you start calling the property management firm, you have to do your own calculations. This to see if the additional costs of the property management is still allowing you to generate sufficient cash flow. You need to be able to pay the mortgage, property taxes, insurance and allow excess cash for maintenance and mishaps.

Our real estate investments are managed to assure our taxation is considered in Box 3. This is financially the most interesting option for us. That being said, our effective tax rate is not as low as 7.2% as noted in the above example! Still it’s worth having a management company for us, also regarding tenant risks.

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8 Comments

    1. Our major issue is time constraints and the associated paperwork (e.g. payroll taxes, etc.). We simply don’t have the time with two full time jobs, a kid and a company on the side. Maybe if our portfolio grows that it might become interesting. But for the few properties we do have, Box 3 investing with expert support is a much more trouble free way of investing with very little effort required.

      Thanks for dropping by.

  1. I like how real estate investing is tangible and ‘makes sense’, but I was always too nervous too get in it. The entry barrier is quite high and I always preferred the liquidity and ease of stock investing. Do you have any tenant drama/stories to regale us non-RE investors with? 😉

    1. Hey VN,
      No, fortunately no tenant drama to date. But we have also been using the property managers for tenant screening, etc. So this is a layer of risk management as well. So besides the tax advantages of using one, it also is a risk management tool for us.
      However, if you want to get into it, my recommendation would be to start with REIT’s and go for the dividend instead. A lot less hassle when you are on the road travelling like you guys want to.

    1. Capital gains are not taxed, which is great. But the wealth that you have to create these capital gains is. In short, the more capital gains you make (percentage wise on your investment), the lower your relative tax burden. As for dividends, you pay 15%, but they appear to be able to be credited for taxes on wealth to avoid double taxation.

      The problem with the system is that if you have a bad year, and you ROI is less than 4% (which is what the government assumes your ROI is every given year, and tax it at 30%), your tax burden automatically becomes more than 30%. Really a double whammy in times of crisis. But when the market does well, you tax burden is relatively low. Strange system, is it not?

  2. Very interesting CF, I haven’t seen a country that is taxing by wealth rather than income before. Are you concerned that this option will be taxed higher?

    Are shares tax in this way, or just on income and gains? I’d be a little concerned about a wealth tax playing a bigger part..

    Tristan

    1. We are taxed 6 ways to Sunday 😉 My only fear is that in time the taxation will shift from tax on income to more tax on wealth (aging population = less income tax and lots of wealth to be taxed). The latter would be detrimental for everyone on the FIRE tour. As noted to Mr. Tako, capital gains are not taxed separately as they are assumed in the 4% ROI that the government assumes you make on your wealth.

      Our great pet peeve with wealth tax, it that it is tax on funds you already paid tax for (it was generally obtained from work). So it feels like double taxation.

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