Thinking of renting out your garden house? If so, watch out!

The Airbnb platform has been booming in recent years. It is all very easy in principle: you register, you indicate that you have space available for a certain period of time and, hey presto, before you know it, you have it rented out. More and more people are renting out their spare room or even their own house when they are away for a bit. It is also possible to rent out your empty garden house. It’s always nice to have extra income, but how should it be taxed? Chances are that when you rent out a garden house you assume that this income must be ‘taxed’ in box 3. Not a crazy thought, as the Noord-Holland District Court and the Amsterdam Court of Appeal have also ruled the same. But both of these were recently overruled by the Supreme Court (ECLI:NL:HR:2020:1448). With its final ruling that income from renting out a garden house is to be progressively taxed in box 1.

  1. Judgement of the Court
  2. Judgment of the Court of Appeal
  3. Judgement of the Supreme Court
Judgement of the Court

What were the exact circumstances? A taxable person rented out his garden house for 21 days in 2015. This taxable person did not declare his income in his income tax return, as he was of the opinion that the holiday home was part of the box 3 base, meaning it should only be taxed at a flat rate. The tax inspector disagreed, and imposed an additional assessment in which, under Article 3.113 of the 2001 Income Tax Act, 70% of rental income is to be considered box 1 income. This article read as follows in 2015:

“With regard to the owner-occupied home temporarily made available to third parties, the amount to be taken into account as owner-occupied home benefits under Article 3.112 shall be increased by 70% of the benefits in respect of making the home available.”

The Noord-Holland District Court found in favour of the taxable person. In its view, it is clear from parliamentary explanations and legislative history that this article only refers to situations in which the entire owner-occupied residence is rented out. Because Art.  3.111 (7) stipulates that the temporary provision of a house to third parties does not deprive it of its character as a principal residence, the house is still the principal residence of the taxable person. As a result, the proceeds are not taxed in box 1.

Judgement of the Court of Appeal

The Amsterdam Court of Appeal concurs with this ruling, albeit with different reasoning. According to the Court, the garden house is not part of the owner-occupied house. Due to the rental, it is only temporarily available to the taxable person as a main residence. It follows that the garden house belongs to box 3 base and is therefore only taxed at a flat rate. This judgement is striking, as if the garden house is not permanently intended for temporary rental and is also used by the taxable person, it follows from Art. 3.111 (1) of the 2001 Income Tax Act that the garden house belongs to the taxable person’s own home for tax purpose.

Judgement of the Supreme Court

This judgement was dismissed by the Supreme Court. The Supreme Court ruled that the garden house is still part of the owner-occupied property even during the period of temporary rental, which is in line with the intention of the legislator that there are no tax consequences with regard to the owner-occupied home scheme when an owner-occupied home is temporarily rented to a third party.

Whereas the Court concludes, based on the parliamentary history, that the income is not taxed on the basis of Art. 3.113 of the 2001 Income Tax Act, the Supreme Court rules exactly the opposite. In its opinion, this reading of the provision is not in accordance with the legislator’s objective. Thus, the Supreme Court concludes that the income, under Art. 3.113 of the 2001 Income Tax Act, should be taxed in box 1.

It is clear that the above statements are not entirely logical, as each instance makes a different judgement. The fact that there is also disagreement in the literature on the matter doesn’t simplify matters. However, the Supreme Court ruling now provides clarity: income from renting out a garden house for a short period of time is taxable in box 1. So be careful in the coming period if you’re thinking of renting out your garden house! In addition to observing the Corona measures, it is therefore also wise to be well prepared from a tax perspective.

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