This is why you can’t deduct your full interest payments from your gross income.
In this article I will try to explain, in a very simple way, how the notional rental value works and how it affects your mortgage payments deduction.
When they buy a house, a lot of expats in the Netherlands don’t realise that as home owners, their income will fictively increase with the notional rental value of the property. In Dutch it is called the ‘eigenwoningforfait’. The notional rental value is a percentage of the WOZ value (the WOZ value is the value of the property as determined annually by the municipality based on housing market developments in certain neighbourhoods and streets).
The percentage is based on the actual value of the property the year before. For example, if you are filing your taxes in 2015 you will need the WOZ value of your property in 2014 in order to determine which percentage of the WOZ value you will need to calculate. The most common rate is 0.60%. Below you will find the different scales with the percentages based on the WOZ value.
|€ 12,500||€ 25,000||0.20%|
|€ 25,000||€ 50,000||0.35%|
|€ 50,000||€ 75,000||0.45%|
|€ 75,000||€ 1,090,000||0.60%|
|€ 1,090,000||–||€ 6,540 + 2.35% over the excess of € 1,090,000|
As mentioned above, most people are likely to pay 0.60% of the value. If we take a closer look on what effect this has on your tax return you will understand why not all interest payments are tax deductible. For example:
Your yearly gross income is € 50,000 (= max 42% wage tax)
Your mortgage (interest only) is € 125,000 with an interest rate of 2.5%
The WOZ value of your property is set at € 100,000 which means your income will be increased by 0.75% of € 100,000. This makes your income € 50,750. Because your employer only withheld taxes based on your salary it is likely that you will have to pay 42% of this € 750 which is € 315. (Keep this € 315 in mind.)
Your annual interest payments total € 3,125. This means that you can decrease your income with this amount to € 46,875. Were there no notional rental value you would have paid € 1,312 too much in wage tax on your salary because your employer withheld taxes based on € 50,000 and received this amount back from the tax authorities.
However, because in this case the notional rental value is € 315 you must deduct it from the € 1,312 which means you will “only” receive an amount of € 997.
Unfortunately, not all mortgage advisors or real-estate agents mention this when you are busy buying a house.
Please note that the above is a very simple explanation of how the notional rental value works in the Dutch tax system the numbers in the example are based on earlier years however the system still works the same way, and we are happy to support you with our tax return services at Tax & Service Solutions.