A couple owns a second home that is not held as an investment property and is not rented out. The question is how this home should be taxed in Box 3 under the restoration of rights. The top court provides a very comprehensive guide to various practice situations.
Main line
The unrealised increase in value of the second home is also part of the actual return. Below, the Supreme Court elaborates on how the actual return should be determined in concrete terms.
Unrealised changes in value: property all year part equity
Positive and negative changes in the value of assets in box 3 belong to the actual return, even if the taxpayer has not yet realised those changes in value. For assets belonging to the taxpayer throughout the year, the starting point is the difference between their WOZ value at the beginning and at the end of the year.
The value of the property at the beginning of the year should be based on the value in the WOZ assessment. That is the value the house had on the value reference date, one year before the beginning of the calendar year for which that value is determined. For the value of the home at the end of the year, the value of the home determined pursuant to the WOZ Act for the following calendar year, for which the value reference date is also one year prior, should be used.
Unrealised changes in value: house part year part equity
In the case - not occurring here - where the taxpayer has acquired or disposed of a home belonging to his assets in box 3 in the course of the year, the change in the WOZ value of the home should only be taken into account when determining his actual return insofar as it is attributable to the part of the year in which that home formed part of the taxpayer's assets in box 3. Here, for both the transferee and the transferor, the change in the WOZ value between the beginning and the end of the year should be attributed time-proportionally to the period in that year in which the home belonged to the person's assets in box 3.
Unrealised changes in value: shift within equity
The value of the taxpayer's total box 3 assets may change because one asset in box 3 is replaced by another asset to which different valuation rules apply. This situation may occur, for example, when a home is acquired or disposed of. Also, the value of the taxpayer's total Box 3 assets may undergo a change due to the taxpayer acquiring or disposing of a property that is exempt. Such changes in value are not caused by a development in the value of an asset and therefore cannot be seen as actual returns achieved. This implies that in case of a purchase or sale by the taxpayer of a house belonging to his assets in box 3, any difference between the purchase price and the WOZ value of that house affects the value of the total assets in box 3, but does not qualify as actual return in box 3.
Unrealised value adjustments: investments
In practice, there is a lack of clarity as to how to deal with further investments in an immovable property after its acquisition (hereafter also referred to as further investments) when determining the actual return of an immovable property in box 3, in the context of providing restoration of rights. This concerns expenses that do not qualify as maintenance costs, but relate to improvement and expansion of the immovable property, which should also include the construction of a building on land belonging to the taxpayer.
The starting point is that the initial investment made by a taxpayer by acquiring an immovable property, even in cases where that property is already in an improved or extended state, will not in itself result in the taxpayer making a return on that property in the year of investment. The value of that property to be taken into account at the end of the year will only give rise to a finding of actual return in Box 3 to the extent that this value exceeds the initial value in Box 3. Indeed, to the extent that the value at the end of the year corresponds to the investment, the taxpayer cannot be said to have actually achieved a return. To that extent, it only concerns (the counter value of) the equity contribution.
A balanced application of the law implies that this treatment of the original investment when acquiring a property applies equally to the calculation of the actual return of the year in which further investment in a property takes place. After all, both are investments. This means that the increase in value as a result of further investment cannot be regarded as a return. In a year in which the immovable property is additionally disposed of, this applies to the calculation of both the return of the transferor and that of the transferee.
Costs of extending or improving an immovable property therefore have a different impact from maintenance costs when determining the actual rate of return. Although maintenance costs are not deductible, as are investment costs, any change in the value of the property resulting from maintenance costs is part of the actual return.
A demarcation is therefore needed between maintenance of and further investment in an immovable property. This means (i) that costs for work on an immovable property are to be regarded as maintenance costs to the extent that the purpose of such work was to restore or maintain the property as it existed at the commencement of the work in a usable condition, (ii) that in cases where, in the case of alteration work on a property, both repair and renewal take place, (iii) that such a division does not arise where the object involved in the alteration has been so radically renovated that it is essentially new construction, in which case there is no maintenance at all.
When it comes to residential property, the treatment of investments must take into account the circumstance that the WOZ value is normative for determining the change in value forming part of the actual return. If the taxpayer has made further investments (extension or improvement) in a home that is part of his assets in box 3, the starting point that the change in value to be taken into account as actual return is equal to the change in the WOZ value in the course of the year cannot be taken for granted. However, a deviation from that assumption is only appropriate in the case of residential property if the WOZ value is determined at the end of the year due to an interim change. The part of this final value attributable to the extension or improvement is then disregarded when determining the actual return of the year in which the further investment took place. It is up to the taxpayer to establish facts, and in case of dispute, plausibly demonstrate the need for such deviation and its extent.
Note: In determining the actual return, the Supreme Court explicitly does not take into account a benefit due to own use of the second home.