As noted in another post a while back, the Dutch Real Estate investors are under attack. The question remains, do you (partially) sell and move on with your money. Or is an assessment of your portfolio from a tax perspective a good idea (it always is). But now with the aim to find the financially best mode of investment if you want to keep your real estate portfolio and retire on it.
Box 1, 2 or 3?
What tax changes, when and how much? Those are the first things we need to know. Box 1 and 2 change are likely limited. Box 3 will obviously see big changes. These are:
- Leegwaarderatio changes (i.e. how much wealth you have in Box 3): likely 01-01-2023. Effects: higher wealth in Box 3.
- Updated to Box 3 calculation of wealth taxes: proposed 01-01-2026. Effects: taxation on real returns/interest rates. Until that time, a “Bridging” period is maintained where “forfaitaire” Return on Investment and interest rates (educated guesses) as used to calculate your taxable “income”.
Changes that affect all 3 tax boxes is the following:
- Changes in limits to rental rates: proposed start 01-01-2024 (albeit they won’t take effect until you get a new tenant). The assumed average reduction is about €190/unit per month.
To be able to make a comparison that makes (some) sense, I’ve done the following. I’ve made simplified calculation as to the taxes owed for year 2021. The gives the baseline and shows how much more interesting Box 3 is with investing in real estate.
The next calculation will be for tax year 2022 (using expected Box 3 ROI and interest rates), but assuming the leegwaarderatio and rental limits as noted above have already come into effect. We are thus not (yet) calculating with actual ROI and interest rates as is proposed per 01-01-2026. This could in fact be a worse case scenario, as the net ROI are lower than the forfairtaire ROI’s used. Hence, a lower taxable income in Box 3 would be expected.
Okay, every good calculation has a bunch of assumptions, here are those for this comparison:
- Porfolio market value is €650.000 and €1.300.000 respectively
- Portfolio WOZ (Tax assessed) value €550.000 and €1.100.000 respectively
- Gross ROI based on market value is ~7.7%, giving a gross rental income of €50.000 and €100.000 per year respectively for 2021. This is assumed to be 4 and 8 units respectively, with rental rates in the mid-segment (~€1040/unit/month).
- For 2022, with the average assumed reduction of €190 per month, we are left with €850/unit/month. This leaves us with about €41.000 and €82.000 per year respectively.
- Because of this ROI, the WOZ assessed values count for 85% in Box 3 (“Leegwaarderatio” corrections for rented real estate). With upcoming plans, this will be changed to 100% of the WOZ value in Box 3.
- No mortgage/loans required.
- Maintenance, insulation & repairs is assumed at 2.0% of market value per year (in reality this will fluctuate significantly over the years), it’s assumed to be done by contractors or external parties. For box 1, when you can do the work yourself, these expenses could be reduced a bit. But for sake of a this comparison, I keep them the same.
- Insurance rates are based on experience, same for property and local taxes and property management services. Again, these differ per municipality and service providers, but should not be far off.
- Tax rates, reductions and limits are all from the “belastingdienst” website.
- For box 3 you cannot perform work, any property management is therefore outsourced. Again, we use numbers we have from (longer term) experience for these items.
- All expenses are kept constant for both years (yeah, I know, inflation….) for sake of simplicity.
- I reserve the right to make some mistakes here 😉
Benchmark – 2021 Tax numbers
As noted earlier, the benchmark for this assessment is tax year 2021. Based on the above, this is what I calculate:
As also mentioned before, Box 3 is the clear winner in terms of tax burden. However, there are some big variations for the other boxes in terms of effective tax rate. This is because a low income in Box 1 also has a limited tax burden. Hence, if you want to live solely off your investments, and you can get by with about €25-26K per year. Box 1 is the way to go. If you want to do even less and outsource the management, Box 3 would be great too. You essentially buy some passive income for that €1200 a year in lower net income.
However, if you have a large portfolio, Box 3 quickly becomes the better place to be taxed. It quite literally saves you thousands a year compared to Box 1 or 2 (and less work, since everything is outsourced). Also, take a quick look at the net ROI’s, they are only about a 3,3-4,1% after taxes. And there is quite some risk involved with investing in real estate. That being said, capital gains are not taxed and have been substantial over the past few years. Albeit that can reduce, and likely will in the coming years with higher interest rates and a potential recession looming.
WOZ ROI side note
Also, and this can bite in the future, the ROI according to the Taxman is based on the WOZ value, which is commonly lower than market value. So, where a gross ROI on market value is 7,7%, the gross ROI on WOZ value is a solid 9,1%. The net ROI before taxes on WOZ value in Box 3 is 5,2% (vs 4,4% on market value), not the same as the forfairtaire ROI of 5,69% (for 2021) / 5,53% (2022), but close. Obviously, if you bought a long time ago, your personal ROI is higher on your invested funds. But for a newbie that just started in the past year or two, this is roughly what you’d be looking at (if you are lucky).
“2022 numbers” – with future changes already included
Okay, now for the same as above, but then for 2022 with all proposed changes assumed to have already been incorporated (except taxation on actual ROI). This is what I get from my trusty Excel:
First thing you notice is that the rental income is greatly reduced (by 18%). Less rental income, means lower Gross ROI and a lower net income. For our first case (Box 1, combined €650k property value), the net ROI after taxes drops from 4.1% to 3.1% (i.e. a 5K lower net income!). That is a big whammy.
Now check out Box 3 with a €1.3M porfolio. This drops like a brick from €47,4K down to €23,7k in net income after taxes. That just hurts. The tax burden jumped from 16,5% to 38,9%. As I noted in the previous post, I don’t mind a correction of the taxes in Box 3, but this would be pushing it! Again, if you would be taxed on actual ROI (as per plan for Box 3 in 2026), the damage would not be as bad. But you would have to keep quite the administration to keep track of all the expenses (not sure if that “work” would be seen as Box 1 ;-).
That being said, if you have no other income in Box 1. This would be the place to move your real estate to when all these changes are being implemented. Also solves the “work” part in keeping the administration for the income and expenses.
“2022 numbers” – with future changes already included + a mortgage
One more to add to the mix. Let’s assume the above scenarios, but you still have an “interest only” mortgage (“aflossingsvrije vastgoedhypotheek”). For the original €50.000 rental income cases where the property value was €650.000, we assume a €300.000 mortgage. For the €100.000 rental income case where the total property value was €1.300.000, we assumed a €650.000 mortgage. This leaves you with an actual net worth of €650.000 (so basically the same as the €50.000 rental income scenarios shown above – so we can compare the differences a mortgage makes). I do realize that one’s taxable wealth is not the same (in this case it’s about €100.000 lower due the mortgage), compared to the 2021/2022 €50.000 rental income scenarios.
The assumption is that the mortgage rate is 3,5% for a 10 year fixed mortgage (which was not uncommon about 9-12 months ago for a 50% Loan To Value (LTV) mortgage. It might even have been a bit lower. But it is still higher than the 2,46% interest rate the government assumes for 2022.
When comparing this €100.000 to the €50.000 income options in 2022 (ex mortgage), it’s clear that the mortgage leverage works for both the Box 1 and 2 options. You get a slightly higher ROI before and after taxes. However, for Box 3, where the “leverage” works in reverse order (because of the higher actual interest than the forfairtaire interest), you get hit even harder. The end result in a ROI after taxes of 1,3% and an effective tax burden of almost 50%. I mean, you have €82.000 in gross rental income, and you are left with not even €8.200 in net income after expenses and taxes. That is not a good business case!
Obviously, we took these numbers to get some sense for ourselves. Our portfolio is running in between the two options, albeit closer to the lower one. Looking at this, it’s obvious that this is going to seriously hurt. Out of the 6 units we have, 3 would be at risk of rental income reductions in the future. The other three (2 in the social rental class and one commercial unit) hopefully won’t see any (negative) changes.
Now, we did a lot of renovations and improvements. Most of our units have primarily HR++ glass, and around 12cm of insulation in most places. We went from G and D energy labels to (likely) C and B (or even A). We have not done the assessment(s) yet, our tenants know the insulation if good due to the relatively low energy bills they get. And the new label is not due yet for another few years anyway (I am curious though where we will officially land). The point I’m trying to make is that the point system rental corrections might not be too bad after all. Especially when the outside space and energy efficiency is likely going to have a bigger impact on the rental point system.
The other point that I also want to make is that we invested a lot of money into these properties. Now, the value increase outpaced the expenses sunk into them. Despite buying in 2014 and 2016, the expenses effectively made these values as if we would have bought in 2018-2019, roughly (with associated ROI’s on the properties).
That being said, it will still hurt!
Stay put of sell?
Looking at the numbers above, knowing we are not the “worst case scenario” shown, real estate investing for just a few percent per year in ROI is not worth the risks we are taking. With a portfolio that consists of about 80% in real estate, the upcoming changes seem to be too negative to keep the portfolio as is. We don’t sell all our real estate, we still like the cashflow and tangible assets too much. But we likely will sell some in the future and get a more balanced portfolio with other asset classes. Another option is that I stop being “Koos Werkeloos” and become a Box 1 real estate investor!
I guess that government is going to get what it wants, fewer rental properties and more home ownership. I think that the government is making a mistake here though. By primarily punishing the DIY investor, those that invested for his or her pension, for a flawed housing market. Whereas proper enforcement of the point system would have partially limited some of the excesses in the market (it would have driven the really crappy landlords out of business). Also enforcing short term rentals (for seasonal / labor migrants) would have helped a lot. Anyhow, life can be disappointing, what matters is how you deal with it!
What’s your take on this?
P.s. thanks to reader comments a minor corrections made to the “2022 – no mortage” scenario due to too high maintenance costs (€15K vas €13K) compared to the other calculations. All following changes updated. Overall impact, about 0.2% after taxes (too low).