With low interest rates on savings accounts, many are looking for a way to get more return on their savings. Investing in a vacation home is a smart move that combines the useful with the pleasant. It is important not to lose sight of some tax considerations.

Vacation home on your tax return form

If you do not reside in your second home permanently, it belongs to the “box 3” assets on your tax return form. That is, the actual income and expenses related to the vacation home are not relevant to your tax return. The amount on which you are taxed is a notional return on the WOZ value of the home. This varies between 2.871% and 5.39% in 2017. The amount is reduced by any debt on it.

Second home abroad

Do you have a vacation home abroad? Then you are usually allowed to use the “deduction taxed elsewhere” rule in the Netherlands. This way you avoid being taxed twice. The taxation usually takes place in the country where the house is located. It is important that you inform yourself about this well in advance.

VAT on vacation home income

If you are the owner of one vacation home and rent it out, you are not an entrepreneur for income tax purposes. In terms of VAT, it is different: you pay 6% VAT on the rental income. On the other hand, you may also reclaim VAT on expenses you incurred and things you purchased. Usually this leads to a refund. If you use your vacation home partly yourself and rent out the rest, the VAT is calculated proportionally. For example, if you live in the house one month a year, then 11/12 of the VAT is deductible. If you want to get around this, you can run all the rentals with an intermediary. But then you have to pay rent yourself during the period when you move into the house, which may not be as interesting.

• Concrete example vacation home
• You invest 150,000 € in a finished, furnished vacation home with your own funds.
• Total cost: 7,500 € (incl. municipal taxes, insurance, depreciation)
• 25 weeks of rental/year
• Rent averages 600 €/week
• Annual income: 15,000 €
• What you are left with: 7.500 €, or 5% of your investment of 150.000 €.

Even after ‘box 3’ taxation, you will still have a nice amount left over!
So investing in a vacation home is a smart way to get more return on your savings. What’s more, you can go on vacation cheaply, which is obviously a nice bonus!