House division: opportunities and pitfalls for real estate entrepreneurs

House division is increasingly being cited as a smart and relatively quick way to address the housing shortage. The Ministry of Housing sees significant opportunities for better utilizing the existing housing stock and states that private individuals can make a substantial contribution by dividing larger homes into multiple independent living units. This potentially creates hundreds of thousands of additional homes, often in existing neighborhoods where amenities are already available. However, in practice, house division proves to be less straightforward than it appears on paper. Anyone who delves into the legal and tax implications quickly discovers that this promising solution also harbors serious pitfalls.

The promise of splitting

The idea behind splitting homes is appealing. The Netherlands has many relatively large homes that are now occupied by one or two people, while they were once intended for families. By dividing these homes into two or more independent units, the living space can be used more efficiently. This is a particularly suitable solution for older people who have extra space after their children have left but don't want to move from their familiar neighborhood. At the same time, it creates housing for first-time buyers, students, or young families who are having difficulty finding suitable housing.

Research shows that the potential is enormous. Within the owner-occupied segment alone, more than half a million homes could be eligible for division. This would significantly increase the accessibility of the housing market. Yet, actual implementation lags far behind. Only a few thousand homes are divided annually in the Netherlands. This is partly due to unfamiliarity and local resistance, but mainly to the complexity of regulations and taxation.

Legally possible does not automatically mean tax-efficient

A major misconception surrounding the division of housing is that it's primarily a structural intervention. In reality, division is primarily a legal process. Only when a property is legally divided into condominiums does it become independently transferable units. Municipalities play a role in this through permits and housing regulations, which can vary significantly from municipality to municipality. What might be relatively simple in a small municipality can be accompanied by extensive requirements and procedures in a large city.

But even if the legal aspects are in order, the tax issue quickly arises. For individuals who divide their own home, the transition from box 1 to box 3 can have far-reaching consequences. As soon as part of the home no longer qualifies as owner-occupied, that part falls into box 3. This transforms a relatively simple tax situation into a complex system of flat-rate returns, reference dates, and limited deduction options.

This leads to awkward situations. A private individual who divides a property out of social responsibility or practical necessity can be worse off tax-wise than someone who does nothing. Renovation and division costs are not deductible in Box 3, while the tax liability is separate from actual rental income. As a result, a solution to the housing shortage can end up in what many perceive as a fiscal hornet's nest.

Investing, renting and the risk of box 1

For investors, the playing field is different, but here too, the pitfalls are significant. Property division is increasingly being used as a strategy to create value in a market where renting has become less attractive. By dividing a property into multiple apartment rights, it becomes possible to sell them separately. Legally, this is permissible, but tax-sensitive.

The Dutch Tax and Customs Administration distinguishes between investing and developing. Those considered investors generally remain in Box 3. However, those classified as project developers by the tax authorities run the risk of having their profits taxed in Box 1 at significantly higher rates. This risk increases in the case of large-scale renovations, rapid resale after a division, or a structural approach involving the simultaneous renovation of multiple properties.

Rent regulation is also playing an increasingly important role. Thanks to the Affordable Rent Act, many split apartment rights, particularly smaller units in urban areas, quickly fall into the regulated mid-range rental sector. Anyone calculating with private sector rents without first assessing the housing valuation system may be confronted with a flawed business case.

Furthermore, VAT on renovation costs for regular residential rentals cannot be reclaimed. Attempts to circumvent this through short-stay or hotel-style rentals carry other risks and are subject to strict scrutiny.

Between solution and discouragement

Property division undeniably has potential as a tool to alleviate the housing shortage. The new government says it wants to lower permit thresholds, among other things, and encourages municipalities to make property division easier. At the same time, the tax treatment lags behind these policy ambitions. For individuals, property division often means a jump from box 1 to box 3 without clear transition rules or compensation. For investors, it requires extremely careful planning, documentation, and timing to avoid tax reclassification.

The bottom line is that splitting a property requires strict management. Anyone considering splitting is wise to consider not only the structural and municipal options, but also the short- and long-term fiscal implications. Without this preparation, a promising move can unintentionally lead to financial setbacks.

This article previously appeared in Ondernemersbelang: https://www.ondernemersbelang.nl/nieuws/woningscheiding-kansen-en-valkuilen-voor-ondernemers-in-vastgoed/