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4-Freedom | Fiscal matters

4-Freedom | Tax Technical

You want to buy a second home. What about tax? How does that actually work?

When you have your own property, your property falls under Box 1 | Income gained through work and home.

Which falls within Box 1?

Counted all together:

  • -Your salary from employment
  • -Your profit from enterprise
  • -Income from other activities, e.g. freelance assignments
  • -Income from social benefits and pension
  • -Income from annuity products
  • -Income from alimony
  • -National rental value

Thereof deducted:

  • -Paid interest on own property debt (mortgage interest deduction)
  • -Entrepreneurs deduction
  • -Employee deduction
  • -Expenditures on income
  • -Paid alimony
  • -Other personal deduction

Below you see the current tax rates for the income tax for Box 1 for the year 2010. As you see, a progressive system applies here. Meaning: tax rates increase when the income increases.

Income box 1up to 65 yearfrom 65 year
IB Disc 1: up to €19.822,-36,50% 15,55%
IB Disc 2: €19.823,up to €33.589,-42,00% 24,05%
IB Disc 3: €33.590,- up to €57.585,-42,00% 42,00%
IB Disc 4: from €57,586,-52,00% 52,00%

Buying a second home

When you buy a second home, the second home, e.g. a holiday house, investment property or a room rental property, falls in Box 3 | Income of savings and investments.

Which falls within Box 3?

Box 3 taxes income from savings and investments. The taxable income is calculated by adding all sources of income decreased with all deductions. The most important items are listed below.

Counted all together, value of your belongings:

  • -Investments in stocks, mutual funds, bonds and other investments
  • -Real estate, own home excluded
  • -Duties on real estate, e.g. usufruct
  • -Value of investments/savings, if not included in Box 1

Thereof deducted all debts:

  • -Debts, except for claims related to your own home or substantial interest

Over the total ballast capacity in Box 3, a percentage of 1.2 should be paid for income tax. This percentage is not chosen at random. The tax office assumes that your efficiency percentage is at least 4% on all belongings (actual efficiency is not relevant). Out of this 4%, the tax office is asking 30% of wealth tax:

30% of 4% is 1.2%

In Box 3 a tax-free equity counts per subject to tax. In 2010 it is 20.661 (same as in 2009). This means you only pay tax when your dutiable income in Box 3 comes above the amount of 20.661.

Subjects to tax who have authority over minor children have the right for an extra tax-free equity of 2.762 (same as in 2009) per child (per family).

Properties (excluding own home), when you purchase them privately, fiscally fall under Box 3.

The advantages of Box 3 with respect to investment properties and student homes:

  • -Mortgage is not deductible, but no tax is paid on rental incomes
  • -No tax is paid on sales profits of investments
  • -The value of your investment property is appreciated at the WOZ (real estate valuation) value of the property in rental state*

* A correction on the real estate valuation is allowed. Usually the value of real estate rentals lays 10% - 15% under the real estate valuation. The tax office has no rules attached to the determination of this correction. Perhaps an appraiser can do estimation for you.

N.B. If you have privately held companies other rules apply.