A private individual has bought a plot of land with the intention of having a property built on it and then selling the whole property. For this project, he borrows €437,000 from a bank. He accounts for the plot and the loan in box 3. Once construction has already started, the individual cannot meet his payment obligations and the plot is eventually auctioned for €42,000. In the tax return, the private individual records a loss of €170,000. The tax authorities deny deductions.
In the court, the question was whether the plot of land was optional assets, and could therefore be declared as private assets in box 3, or, in retrospect, actually compulsory business assets. In case of compulsory business assets, inclusion in box 3 was not correct, the plot should have been included in the balance sheet and a loss on sale would indeed be deductible.
Judge's considerations
Mandatory business assets include assets that are so closely related to the business that they cannot reasonably be classified as other than business assets.
The court assumed that the private individual's activities - which consisted solely of developing the plot of land by building (or having built) a residential/commercial property on it, with the intention of subsequently selling the property at a profit - should be classified as an enterprise from the outset.
In that case, the plot of land is entirely subservient to the business run by the individual. That circumstance means that it would be beyond the bounds of reasonableness to include this asset in private assets. The plot of land can therefore only be regarded as compulsory business assets.
Conclusion
The individual wins the case. The sale loss is fully deductible.
Note: A factor in this case was that the private individual had initially opted for private equity and when things went wrong still wanted to deduct the loss as a business loss. The tax authorities do not always appreciate this eating both sides of the fence. Fortunately, the court gave an objective opinion.
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