The government has submitted a bill to phase out the deduction due to no or low owner-occupied housing debt, also known as the Hillen deduction. This measure is to take effect from 1 January 2019.
Hillen deduction
If you pay little or no mortgage interest because you have a small or even no owner-occupied home debt, you are entitled to a deduction for no or small owner-occupied home debt. This deduction is calculated on the difference between the owner-occupied home lump sum and the deductible costs of your own home, such as mortgage interest. Because of this deduction, you do not pay tax on the owner-occupied home lump sum. This is because the benefit from the owner-occupied home is zero.
This scheme was devised at the time, by MP Hillen, to motivate homeowners to repay their owner-occupied housing debt as soon as possible. Due to the repayment obligation, applicable as of 2013, the Hillen deduction has become a redundant scheme, according to the Cabinet.
Example
If you own your own home with a WOZ value of €300,000, then the owner-occupied home lump sum is €2,250. Suppose your owner-occupied home debt is €60,000 and the applicable interest rate is 3. Then the deductible mortgage interest is €1,800. The difference between the owner-occupied home lump sum and the mortgage interest is €450. This €450 is currently fully exempt under the Hillen Act. As a result, the benefit from own home is €0 and no tax is charged on it.
The bill
From 1 January 2019, the new government plans to phase out the Hillen deduction, so that eventually there will be no deduction no or little owner-occupied housing debt. For 30 years, the deduction will be limited by 3 1/3% per year. For 2019, this means that you are allowed 96 2/3% of the difference between the owner-occupied property tax credit and deductible owner-occupied property expenses. In 2020, you are allowed to deduct 93 1/3% and so the percentage is reduced each year. In 2048, the deductible amount will be 0%. In other words, then the entire owner-occupied home balance will be taxed again.
The above example then gives the following result:
The owner-occupied housing lump sum remains €2,250 (the Cabinet also has plans for a limited reduction of the owner-occupied housing lump sum). Mortgage interest remains €1,800. However, only 96 2/3% of the difference of €450 is now deductible, which amounts to €435. The taxed benefit from own home is € 15.
Assume that, in line with the purpose of the Hillen deduction, you have fully repaid your owner-occupied home debt. Then the tax will be calculated on €2,250 x 96 2/3% = €75. And this amount will increase over the next few years until the full owner-occupied home lump sum is taxed.
The bill has not yet been accepted by Parliament, so the law is not final. So there is still a chance that this change in the law may not pass.