The tax reform and residential real estate: how to take advantage from it?
Article updated in 2021
Enacted on the 1st of January 2017, the tax reform reinforces the provisions to make buying a property in Luxembourg more accessible. The objectives of the changes are to (i) reduce the rising cost to become a homeowner and (ii) make more apartments, houses and constructible land available to counter the lack of offer. Great news for you, should you know how to take advantage of it!
For the seller
The tax reform encompasses a temporary provision to encourage landowners and buy-to-let investors to sell their property as soon as possible. The capital gain tax rate has indeed been reduced to a quarter of the global income tax rate for any sale concluded before the 31st of December 2017. This represents a 50% decrease on the payable tax for these types of sales. The goal of this provision is to increase the offer available to owner-occupants.
For example, for a 300 000 euros off-plan apartment bought in 2009 and sold for 443 236 euros in 2017 (equivalent to a 5% yearly increase in its price), this temporary provision will enable you to save up to 10 282 euros of taxes!
Do you own such a property or land plot? Determine your tax savings for a sale in 2017 by using the Capital gain tool.
For the buyer
Concerning the measures that aim at reducing the cost of owning a home, the tax deductible mortgage interests have increased to 2 000 euros per person in the household for the first 5 years (instead of 1 500 euros), to 1 500 euros for the next 5 years (instead of 1 125 euros) and to 1 000 euros thereafter (instead of 750 euros). If you add the 3 000 euros interest subsidy per adult, you can deduct from your taxable revenues a total of 12 000 euros per year of mortgage interests (considering the case of a couple with one child). This means that for a property worth 764 350 euros, the mortgage interest payments are fully deductible (considering a 20 year mortgage duration, with an interest rate of 2% and a down payment of 20%). With a 41,73% tax rate (for taxable income higher than 91 794 euros for a couple), the actual cost of your mortgage interests will therefore only be 6 992 euros!
Furthermore, since the 1st of January 2017 the fictitious taxable rental value for owner-occupants has been abolished. However the resulting taxable amount was very low, so the aim of this particular change is primarily to simplify fiscal laws.
There is also a bigger advantage in choosing a single premium mortgage insurance compared to the annual premium. Often, the single premium mortgage insurance is fully deductible (according to specific situations). In comparison, annual insurance premiums are now deductible together with interests on non-mortgage loans and are limited to 672 euros annually per person in the household. This means that there is no guarantee that these annual premiums are fully deductible. You may also be missing out on other tax saving products.
Finally, in order to help first-time buyers form a sufficient down payment, the State increased the deductible home savings. The deductible contributions threshold on home savings is now doubled: 1 344 euros for individuals younger than 40 years old, 672 euros thereafter. A couple with a taxable income of more than 91 794 euros can therefore contribute 2 688 euros to form their down payment, while only costing them 1 566 euros. However, these amounts are usually insufficient to form an adequate down payment, meaning you will probably need complementary non-deductible financial contributions or other sources of capital.
To simulate your situation and calculate your tax savings when buying your primary residence, we invite you to use the Buy or rent tool. A tax smart card summarizing all the applicable taxes on real estate for private individuals is also available.