Yes, the whole 2022 tax thing is keeping me “entertained”. Thanks to all for the comments and feedback on my last three posts (including this one). Both the impact on (our) FIRE target(s) and on having Real Estate has given me new interesting insights. But there is one thing I have not reviewed. What’s better with the newly proposed tax system in 2022, Real Estate or stocks & bonds?
Disclaimer: we are not tax professionals and this is only our interpretation of the tax code. Consult a specialist if you want to make sure the tax approach is best your situation!
The difference between Real Estate or stocks & bonds?
In the previous post about real estate because I misinterpreted the proposed tax rules, I’ve updated this error and it affects primarily the heavy leveraged part of the graphs. Why? In the current system you are taxed on net wealth (“vermogen”). Which is defined as all your assets (“bezittingen”) minus all your debts (“schulden”). For real estate the value of your assets is based on the government assessed value (WOZ) times the leegwaarde ratio (85% for a property making more than 7% in gross rent). IF your have a negative wealth due to leveraging, you won’t pay any taxes. This changes in the proposed new system. If you have more assets than €30.846, you will start to pay taxes. So pretty much from your first property, even if you wealth is negative.
Side note, you can also replace “stocks & bonds” with indexfunds, ETF’s, crowdfunding, personal loans, P2P lending, etc. (or any combination thereof). They are seen in the same way from a tax perspective: as assets that are assumed to have had 5.33% return on investment.
I’ve made an comparison for “real world wealth” figures from €0 to €1.000.000. This gives me the following table (you might need to zoom in):
As you can see in the table above (last row), the corrections for real estate (using the WOZ value and “Leegwaarde Ratio”) and high LTV ratio’s gives you a negative wealth for tax purposes. As noted earlier, this doesn’t means that you don’t pay any taxes anymore!. This is also shown in the graph below.
It seems that real estate is actually taxed more heavily then stocks & bonds when you have greater leverage (in the case of this example, about 55% LTV or more)!
However, once your wealth increases (i.e. you have a lower LTV for your real estate portfolio of €1M), the benefits of having less “taxable wealth” compared to a similar value in real world wealth in stocks and bonds becomes bigger once again. Interesting, ain’t it?
Box 3 Income Only
Assuming you have income in Box 3 only, you will be able to apply your general tax credits (“algemene heffingskorting”). In this case the above graph will look as follows:
In the above graph it is blatantly obvious that being a couple is much better financially then being a single. The double general tax credits and income tax credits really help you pay lower taxes at the end of the day.
Taking into consideration the various assumptions and numbers (not considering what this means in cash-flow terms for your real estate), from a tax perspective you can state:
- Both as a single or a couple, you are better of having real estate if your real world wealth is above about €450.000
- As a single, despite having heavy leverage on your real estate, you will still be required to pay taxes.
Now, this comparison is just one of many available investment portfolio distribution. So you will have to calculate how this works for your personal situation! That being said, it does seem that for higher value FIRE portfolios, it’s better to have real estate from a tax perspective in 2022. Yes, it won’t be as great as it is now (2019), but you are still better off.
But there is a warning here too. WOZ values are going up rapidly. This will increase your taxable assets and might bring it closer to what your real world wealth is, limiting the benefits of real estate. Also, it’s to be seen what happens with the “leegwaarde ratio”, the correction of your assets when they are in rented state. I need to keep a close eye on what is happening here.
Another interesting concept is having a big stock market correction. If stocks drop in value by 50% (as they did in 2009), your tax burden will drop significantly too. When you are a buy and hold type of investor, you might be better off in those “bad” years from a tax perspective compared to having real estate ;-). However, I’ll take the cash-flow route, thank you very much.
P.s. the blog also celebrates it’s 4th blogiversary today! This was the first post…..