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%).
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!
- 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.