If you finance the purchase, maintenance and/or improvement of your own home with a loan, you may deduct the interest and costs of that loan from your income from work and home (Box 1).
Fiscal owner-occupied property
For tax purposes, your property is your own if:
- you own it or have beneficial ownership of it, and
- the property is your main residence.
When you buy a new home and move into it, your old home is no longer your own home for tax purposes. If you put the old home up for sale, you may deduct the interest and costs of the loan for another 3 years. If you rent out the old home during that period, you may not deduct the interest during that period.
Relationship between costs and loan
To deduct the interest on the loan, you must be able to prove that the costs of buying, maintaining and/or improving your own home were actually paid with the loan. And you need to keep those supporting documents for a long time, according to our article Keep proof of costs of building or renovating your own home.
If you move to a new owner-occupied home and do not repay the loan on the old home, the old loan is no longer related to financing your own home. Can you then still continue to deduct the interest?
Arnhem-Leeuwarden Court of Appeal
This question is addressed in a case which served before Arnhem-Leeuwarden Court of Appeal. The interested party bought a new house in 2008. It costs €2,200,000, including renovations. He borrowed € 1,510,000 for it. On 1 September 2009, he moved to the new house, so that in 2013 the three-year period for deducting interest on the loan on the old house ended.
He kept the loan on the former owner-occupied home and argued that the interest on this loan was deductible on his new home. The Court ruled that the interested party had made it plausible that, at the time he incurred the renovation costs for the new home, he had already intended to co-finance it with the old home loan (this is evidenced, inter alia, by the commitment of a money loan with his own private limited company). The fact that he initially paid the costs with his own money does not alter this.
Not consistent
After the three-year period, the old home is disposed of on a notional basis. When calculating the owner-occupied home reserve, the Inland Revenue takes the position that the old loan should be disregarded. The argument that this loan is used for the new house is rightly set aside by the Court. Indeed, this is at odds with the justification used in refusing the interest deduction.