Mortgage interest deduction: how does it work when you’re self-employed?

Written by: Sidney Steinmann
A welcome guest to your mortgage advice party is the mortgage interest deduction. A wonderful way of lowering your mortgage costs. But what exactly is mortgage interest deduction? And how does it work when you’re self-employed?

What is mortgage interest deduction?

Simply put, a mortgage is a loan at the bank to buy a house. And when you loan money, you pay interest. When you’re buying a house this is called: mortgage interest. The mortgage interest deduction is a government measure that decreases the amount of income tax you pay. As an entrepreneur the mortgage interest deduction lowers your taxable income and in result you pay less taxes. You could say the mortgage interest deduction is a way for the government to encourage people to buy houses. Because the more affordable it is to buy a home, the more people are able to do so.

When are you entitled to mortgage interest deduction?
Housing prices are high and the mortgage interest relief is a nice bonus for many households. Since 2013 there are some conditions stated to be entitled to mortgage interest deduction.

First you have to pay back the loan in thirty years. Second you also have to have either an annuity mortgage or a linear mortgage. An annuity mortgage has the same monthly costs for the whole repayment period. At the beginning of the period your costs will consist of mostly interest and a small amount of repayment. By the end the repayment is relatively large and the amount of interest is small. With a linear mortgage you’ll pay the same sum for repayment every month. This means you’ll pay less interest every month, which will decrease the total amount of mortgage costs each month. The monthly costs for a linear mortgage are higher than the costs of an annuity mortgage in the first period but are lower in the final period.

The mortgage interest deduction is a deduction in box 1: income from work en home ownership. This means you can deduct the paid interest from your taxable income from employment, but also from profit you make as an entrepreneur. In other words: both employees and entrepreneurs are entitled to mortgage interest deduction.

The entrepreneur, the taxable income and mortgage interest deduction

The mortgage interest deduction isn’t a simple present from the government, but more like a discount with one important condition: you have to pay income tax to receive it and lower your taxes. For entrepreneurs this means you need to make a profit. But what if you didn’t make any or much profit in a certain year (2020, anyone?)? Then your paid mortgage interest can’t be deducted from your taxable income and you won’t benefit from the mortgage interest deduction. When your profits differ a lot from year to year, check if ‘middeling’ is an option.

Paying taxes as an entrepreneur vs. as an employee

When you’re an entrepreneur you pay taxes at the end of the tax year. When you’re an employee you pay taxes every month, because your employer withholds it automatically before paying your salary. Because of this, it may seem like you have to pay tons of money to the tax authorities while people in employment get money back when they do their taxes. In reality you only get money back from the Tax and Customs Administration (Belastingdienst) when you paid too much taxes.

This is the reason why people in employment get a monthly restitution from the Tax and Customs Administration (Belastingdienst). Their employer has already withheld the income tax from their salary. Because mortgage interest deduction lowers the taxable income, they pay too much taxes. They receive their money back monthly* using a tax advance. When you apply for a tax advance as an entrepreneur you can also benefit monthly from this deduction. Normally you can pay your advance income tax monthly. Because of the mortgage interest deduction your taxable income is lower and your monthly amount is lower.

*Of course the mortgage interest deduction can also be deducted at once at the end of the year when you do your declaration of income tax.

From employment to entrepreneurship

When you’re a homeowner and you’re starting your own business, it’s important to stop your monthly restitution. As an entrepreneur your income tax will no longer be withheld from your income automatically. This means you will receive a tax restitution that you’re not entitled to and you’ll need to pay it back at the end of the year when you do your tax declaration.

A fiscal partner instead of profit

If you’re self-employed, you bought a house by yourself, you don’t have a contract for domestic partnership with your significant other and you did not make a profit in a certain year, then you have to pay your mortgage interest all by yourself. But when you do have a fiscal partner (that made a profit or has an employment) then you might be able to work something out. You are fiscal partners when you bought a house together, are living together with a domestic partnership contract or when you have a child together. In that case you can apply the mortgage interest deduction to the taxable income of your partner. So even though you didn’t make a profit, you can still benefit from the tax advantage called: the mortgage interest deduction.

Written by: Sidney Steinmann