The pros and cons of buying a holiday home

Spending time with family and friends, having a peaceful place to relax, enjoying holidays in your favourite country... It sounds like a dream, but could it become your reality? To start off: that idyllic holiday home always costs more than its price tag. For instance, you’ll also need to pay estate agent’s fees (if you use one) and property transfer tax. If you’re buying a second home in the Netherlands, you’ll pay 10.4% property transfer tax. That rate might be somewhat lower on homes abroad. You’ll also owe the notary’s fees for passing the deed of transfer, plus any mortgage deed if you take out a mortgage to cover all or some of the purchase price.

Remember to budget for any home improvements if you buy real estate in need of repairs, or just want to bring it in line with your style. These costs all add up to make the ‘home acquisition cost’. That said, making the right home improvements can increase the value of the real estate.

Alongside the one-off acquisition costs, you’ll need to budget for recurring costs for maintenance, insurance, taxes and so on.

You may not want or be able to cover some or all the costs of buying your second home. If your first home (your primary residence) is worth more than the outstanding mortgage amount, you may be able to remortgage your primary residence and release that equity to fund your second home. Be sure to discuss your personal circumstances with a mortgage adviser. If you want to purchase a holiday home outside the Netherlands and use the foreign home to secure a loan, you’ll need to take out the loan at a bank in that country. Remember that you often owe a down payment of at least 30% or more of the purchase price and usually have to repay the loan over a short period of time.

A second home, like a holiday home, is an asset that you must declare in the Box 3 ‘other assets’ section of your income tax return. These assets are subject to capital yield tax, which is based on a fictitious yield of 6.04% (2024). The value of real estate subject to tax in Box 3 is based on the ‘WOZ’, which is legislation under which local authorities establish the value of properties in their area on an annual basis. The valuation reference date is 1 January of the previous tax year. As the ‘WOZ’ doesn’t apply to real estate outside the Netherlands, the ‘value in exchange’ (market value) is used instead. To calculate the ‘yield base’ for the capital yield tax, any loans you take out on the second home are deducted from the value of your income from savings and investments. This also applies to loans secured against the equity in your main residence (your main residence falls within Box 1 of your tax return). A fictitious interest rate is deducted from loans. This interest rate is set retrospectively each year, with the provisional rate for 2024 being 2.46%. Any realised (actual) rental income, costs and mortgage interest don’t need to be declared on your Dutch tax return.

However, in June 2024, the Supreme Court of the Netherlands issued a series of rulings that this system contradicts EU law. 

If you choose to rent your holiday home while you’re not using it, you can use the rental income to cover all or part of the costs of running the home. You might even have some income spare after deducting these costs. Think whether you’d like to be in the home yourself during the high season, as that will have a negative impact on your rental income. As said, renting your home also involves costs for things like maintenance and cleaning fees. And you’ll also need to factor in management fees: who checks guests in and out and who does repairs while the home is being rented out?

Any rental income and increase in your home’s value can have an impact on the Box 3 tax you owe. If you own a holiday home outside the Netherlands, you’ll usually have to declare the real rental income on your foreign income tax return.

A home or holiday home that you purchase abroad is subject to different rules, formalities and costs to real estate purchased in the Netherlands. For instance, the purchase costs – particularly estate agent’s fees – are often higher in other countries.

You must also declare your real estate abroad and any related mortgage debts in the Box 3 section of your Dutch tax return. However, under double tax agreements, you’re exempt from paying Dutch Box 3 tax on the net capital in the non-Dutch real estate, but you usually will need to pay income tax in the foreign country. Alongside real or fictitious rental income, this tax is often also levied on the increase in the value of the home if you later sell it at a profit.

Some countries such as France and Spain impose a separate wealth tax. However, high exemption thresholds mean you often won’t end up having to pay wealth tax. That said, you’ll almost always owe municipal or communal taxes.

If you die, your beneficiaries or heirs in the Netherlands pay inheritance tax on their portion of the inheritance. If they inherit real estate (or a portion of that real estate) outside the Netherlands, the country in which the real estate is located could also impose an inheritance tax. In many cases, beneficiaries or heirs may set off the inheritance tax they pay abroad against the inheritance tax owed in the Netherlands.

If you die, your beneficiaries or heirs in the Netherlands pay inheritance tax on their portion of the inheritance. If they inherit real estate (or a portion of that real estate) outside the Netherlands, the country in which the real estate is located could also impose an inheritance tax. In many cases, beneficiaries or heirs may set off the inheritance tax they pay abroad against the inheritance tax owed in the Netherlands.

Pros:

• You buy your own place to enjoy
• You might earn a return on your investment if the value of your home increases.
• You may be able to achieve a positive rental yield.

Cons:

• The property may decrease in value over time. Something else less tangible might also decrease: how much enjoyment you get out of having your own place in your favourite spot. It might not be worth the costs for the purchase and upkeep of your home.
• Having your own holiday home could be more hassle than you realised, especially if you rent it out.