Costs of a second home: Careful budgeting is the key!

As with the purchase of a property in one's own country, the costs of a second home abroad is more than just the purchase price of the property.

The key to successfully keeping your finances under control is to know what costs to expect.

Do not make any assumptions about the annual costs of a second home and its acquisition. To guess is to miss!

Acquisition costs can vary greatly between countries and the tax treatment of second homes can also vary widely.

The annual recurring costs of a second home may include taxes, maintenance costs, insurance premiums, management costs and wear and tear due to use and climate. These can also vary greatly from region to region and country to country.

Purchase of real estate | Costs of a second home

The costs of a second home at the time of purchase consists of several components.

Commission for the broker

The commission of a real estate agent varies from country to country and from region to region.

Notary fees and legal fees

VAT or registration fees - Costs of a second home

The European Union has standardised VAT rules but the application of these rules differs from one Member State to another.

Are you planning to buy a second residence in a Member State of the European Union? Then take into account the VAT that you might owe... However, VAT-like taxes may also exist outside the European Union on the acquisition of real estate.

In the European Union, the tax treatment is largely determined by the capacity of the seller.

If you buy a newly built property from a company registered for VAT, this VAT-registered seller must charge VAT on it. This VAT rate varies between Member States and a different rate may apply to residential and commercial properties.
If you buy an existing building (too old to be considered a new building) from a seller liable for VAT somewhere in the European Union, this purchase is in principle exempt from VAT. Instead, you will have to pay registration fees. These registration fees differ from country to country and often from region to region within the country. There are exceptions to this main rule in certain Member States such as Poland.
If you purchase property from a private individual who is not subject to VAT, this purchase is never subject to VAT. As a purchaser, you then have to pay registration fees for such a transaction. These registration fees differ from country to country and often from region to region within the country.

Remark: In certain cases, you can reclaim (part of) the VAT paid if you rent out the property.

Stamp duty

A stamp duty is an indirect tax that the local registration office may levy on certain deeds, such as notary deeds, private leases and documents issued by public administrations.

Mortgage rights

When establishing a mortgage, there is usually a mortgage right.

Conclusion | Costs of a second home on purchase

Bear in mind that the purchase cost can be very high, depending on the country you are buying from and whether you have to pay VAT or registration fees.

So before you make an offer on a property, you should thoroughly analyse and budget for the situation. Do you have a particular destination in mind? Then examine the cost structure in that country to the bone.

Also talk to someone locally who is knowledgeable (such as a real estate agent). Do this before you actually start your search.

Purchase costs vary from country to country and often from region to region within the country.

Annual operating costs of a second home

Do not underestimate the operational costs of a second home either. These are recurring costs that you should estimate well before you buy.

Examples of such costs are:

Capital and interest repayments on the mortgage loan
Annual taxes on real estate
Maintenance and repairs

It is important to know how much these costs will be on a monthly basis. This assessment can help you choose between the different types of properties and answer the following questions:

Will you choose a new building or an existing property?
Will you go for a single unit or do you prefer a property in a complex?
In which region are you going to buy?

Be sure to keep your second home without renting it out if you don't feel like it! After all, in such a scenario, you cannot count on rental income to cover recurring costs.

Also bear in mind that these monthly recurring costs have a negative impact on your potential rental income. After all, part of this income will have to be used to cover recurrent costs.

Use second home as an income property

This calculation and budgeting of recurring costs may also prompt you to consider your second home as an income-producing property. Thus, you can use the acquired rental income to cover the recurring costs.

And strange but true, if you search well, you can find completely carefree formulas to enjoy the best of both worlds:

Private use of the property (x number of weeks per year)
Guaranteed return per year / Guaranteed rental income per year

An example of such a very interesting mixed use formula is: Buying a second home in France in a luxury spa and golf resort with 6 weeks free personal use per year and a minimum guaranteed return of no less than 7% per year on the purchase price.

If you finance (partly) by means of a (mortgage) loan, your actual return on your invested equity can be much higher. Click on the link to find out all the details!

Fun fact: You do not have to deal with hidden costs and other expenses that suddenly pull down your expected annual return. You have the advantage of complete transparency and the guaranteed return is a net return (assuming that you will not use the holiday home for more than 6 weeks per year).

Annual tax on second residence

Even if you continue to live in your home country as a national resident, you will still have to pay various types of taxes in the country where your second residence is located.

Which country is allowed to tax property abroad?

Both your home country and the country in which your second residence is located can in principle tax you on the possession of a property in that country.

You may be taxed in your home country because you derive an income from this property. This is the case if you are a national of a country that taxes the global income of its nationals.

However, the country in which your second residence is located will also want to and be allowed to tax the income from the property. This is because the property is the source of income and because it is located in that other country.

To avoid paying tax in both your home country and the country of your second residence (twice), many countries have concluded double taxation treaties with other countries.

These double taxation treaties exist precisely to avoid such double taxation. Such a double tax treaty clearly sets out which country may tax which income.

In most double tax treaties, the country where the property is located gets the taxing power for the property income from that property.

In other words, in such a case, this income will no longer be taxed in the country where you live and are subject to tax (your home country).

Please note: This can still have other consequences, such as in Belgium where this foreign income is still taken into account for the determination of:

The taxable base of the taxpayer, and
The tax rate applied to income of Belgian origin (all income other than this exempted property income).
As a result, one enters the higher tax brackets more quickly. The fiscal impact of this 'progression proviso' is not negligible!

Taxes on your own use of your second home

Suppose you do not rent out your second home and you use it only to rest yourself once in a while. In such a case, in many countries you will still have to pay taxes on the ownership of this property.

Specifically, you are then supposed to get 'fictitious' rental income from this property. The tax rate and the taxable base (often a cadastral value) differ from country to country.

Taxes on rental income from your second residence

Suppose you rent out your second home to friends and to strangers. In most countries, you are then taxed on the gross income less associated costs such as:

Interest on the mortgage loan
Maintenance costs
Repair costs

Other taxes on the second stay

Real estate tax

In many countries, the owner of a property must also pay an annual property tax.

The tax rate and the taxable base (often a cadastral value) differ from country to country, from region to region and from municipality to municipality.

Wealth tax

Some countries also levy a wealth tax, which in certain cases also takes the value of the property into account when calculating wealth.

In some cases, a first bracket up to a certain amount is exempted from wealth tax.

Association and community costs

If you own a second residence in a community or municipality, in most cases you will also have to pay in some way for street lighting, rubbish collection and so on.

Advice on the taxation of second homes

Each country is different, so it is important to obtain information from a local tax expert. The fee of such a fiscal asset planner can also be attributed to the the costs of a second home.

Also, be sure to investigate the implications in terms of inheritance tax. Do not hesitate to seek advice from a suitable tax expert who is experienced in cross-border wealth planning!

Depending on where you buy your second home, you may be able to optimise your estate to reduce inheritance tax. This is because your estate will be taxed in the country where you are a citizen.

Attention to the Dutch: For Dutch residents who would move abroad to plan their inheritance, there is such a thing as the 10-year rule. You can read more about retirement and inheritance planning at ‘Plan your future before investing in foreign property!'

Insurances | Costs of a second home

Holiday homes are often vacant for long periods of time or they are rented out to third parties. You should therefore take the premiums of appropriate insurances into account when budgeting and calculating the costs of a second home.

If your second residence is located in a special place, you may have to pay an additional risk premium. Examples of such special, high-risk locations are:

Regions frequently affected by earthquakes
Regions in the hurricane belt
Houses built on or near the beach
Flood plains
Areas frequently affected by landslides and/or avalanches
And so on

In all these cases, it is likely that the insurance premiums of your second residence will be higher than usual.

In some cases, your insurance costs may already be covered by community contributions you pay. But beware, often it is only the common parts of the building that are covered by such a common insurance.

And this means that your property and its contents are not covered. You have to take care of that yourself in most cases!