Home to let or for private use

If you’re considering investing in a home or property for private use or to let, it’s a good idea to think about the tax implications

_{This article has been written by the legal advisers in Private Banking.}

When investing in property, you should consider whether the best solution is to do this as an individual or through a private limited company. The answer depends on the purpose of the investment and your circumstances. In this article, we go through the tax implications of buying for your own use and for buy-to-let.

New restrictive rules on private consumption have been issued for companies for assets such as residential property and holiday homes etc., from 1 January 2024. This will have a major tax impact on investments in property by a private limited company that is used or can be used privately. For this reason, it is important to have a proven relationship in this regard so that you can find the best solution for the investment.

Buying for your own use

When can the home and/or holiday home be sold with tax-free profits?

If you want to buy property for use as a residential or holiday home, it is a clear general rule that is most beneficial to make this a personal acquisition.

Both your own home and holiday homes can be sold with tax-free profits under certain conditions. The criteria for tax-exemption when selling your own home are mainly an ownership period of at least one year and an accommodation period of at least one of the last two years in the ownership period, before the sale is agreed. For holiday homes, the ownership period is five years, and there is a requirement for holiday use in at least five of the last eight years in your ownership period. Because the profit is tax-free, you do not receive deductions for costs either, and if you were to sell at a loss, you cannot claim deductions for the loss. Neither are there are deductions for maintenance costs.

The tax exemption applies to homes/holiday homes with a natural rounded plot. This refers to a plot of land that naturally belongs to the home based on a discretionary assessment. If the plot is larger, the excess can be regarded as a sale of the plot, whereby any profit is then taxed as a whole at 22 per cent, regardless of the period of residence and ownership.

When buying a home/holiday home for personal use, rental income may be tax-free, but the tax exemption depends on what kind of property is rented (home/holiday home), how much and for how long etc. We do not discuss these rules in more detail here.

Wealth tax is calculated on the basis of 25 per cent of the market value of your own home, and (70 per cent of market value above NOK 10 million from 2023). The Norwegian Tax Administration determines the value on the basis of the area of the home and a square metre rate that represents a percentage of the calculated market value per square metre in the area. If such a valuation gives an overvaluation in terms of market value, you can demand that the capital value of the primary residence be set at 25 per cent of the property's documented market value up to NOK 10 million and 70 per cent of the documented trade value above NOK 10 million. This is new from the income year 2021. It must be documented that the value exceeded 30 per cent of market value and the capital value was then set to 30 per cent. A reduction requires that the taxpayer can provide sufficient documentation of the property's market value. The market value can be documented with either a valuation or observable market value. This basis must be entered from the period after 1 July of the fiscal year in order for it to have an effect on the assets at the end of the year.

Holiday homes are not covered by the special rules on the valuation of residential properties, but are valued in the individual municipality according to the valuation. The new rules for reduction of asset value do not apply to holiday homes. This means that you must document that the set asset value exceeds 30 per cent of the market value of the property, and the value is then set at 30 per cent, and not 25 per cent, as for permanent homes.

Home/holiday home purchases are often partially financed with debt, which for your own home/holiday home reduces the net asset by its full value. A debt-financed home purchase will thus in principle not only reduce the wealth tax on the equity used, but far beyond this.

When can the home or holiday home be sold with tax-free profits?

If you want to buy property for use as a residential or holiday home, it is a clear general rule that is most beneficial to make this a personal acquisition.

Both your own home and holiday homes can be sold with tax-free profits under certain conditions. The criteria for tax-exemption when selling your own home are mainly an ownership period of at least one year and an accommodation period of at least one of the last two years in the ownership period, before the sale is agreed. For holiday homes, the ownership period is five years, and there is a requirement for holiday use in at least five of the last eight years in your ownership period. Because the profit is tax-free, you do not receive deductions for costs either, and if you were to sell at a loss, you cannot claim deductions for the loss. Neither are there are deductions for maintenance costs.

The tax exemption applies to homes/holiday homes with a natural rounded plot. This refers to a plot of land that naturally belongs to the home based on a discretionary assessment. If the plot is larger, the excess can be regarded as a sale of the plot, whereby any profit is then taxed as a whole at 22 per cent, regardless of the period of residence and ownership.

When buying a home/holiday home for personal use, rental income may be tax-free, but the tax exemption depends on what kind of property is rented (home/holiday home), how much and for how long etc. We do not discuss these rules in more detail here.

Wealth tax is calculated on the basis of 25 per cent of the market value of your own home, and (70 per cent of market value above NOK 10 million from 2023). The Norwegian Tax Administration determines the value on the basis of the area of the home and a square metre rate that represents a percentage of the calculated market value per square metre in the area. If such a valuation gives an overvaluation in terms of market value, you can demand that the capital value of the primary residence be set at 25 per cent of the property's documented market value up to NOK 10 million and 70 per cent of the documented trade value above NOK 10 million. This is new from the income year 2021. It must be documented that the value exceeded 30 per cent of market value and the capital value was then set to 30 per cent. A reduction requires that the taxpayer can provide sufficient documentation of the property's market value. The market value can be documented with either a valuation or observable market value. This basis must be entered from the period after 1 July of the fiscal year in order for it to have an effect on the assets at the end of the year.

Holiday homes are not covered by the special rules on the valuation of residential properties, but are valued in the individual municipality according to the valuation. The new rules for reduction of asset value do not apply to holiday homes. This means that you must document that the set asset value exceeds 30 per cent of the market value of the property, and the value is then set at 30 per cent, and not 25 per cent, as for permanent homes.

Home/holiday home purchases are often partially financed with debt, which for your own home/holiday home reduces the net asset by its full value. A debt-financed home purchase will thus in principle not only reduce the wealth tax on the equity used, but far beyond this.

Buying through a private limited company?

It is also possible to use a private limited company to buy a property and then let it out for personal use. However, the tax rules for this are restrictive, partly unclear and run the risk of an unpleasant tax surprise. With new, tightened rules on private consumers that have been announced as taking effect from 1 January 2024, the tax implications can be significant and increase the need to have a conscious attitude around which investments are made in a private limited company.

If investing in a specific home lies within the private limited company’s purpose and can be justified by the company’s business strategy and ordinary operations, typically leasing, under current rules the shareholder basically pays the same rent to the private limited company that an independent third party would (market rent).

The private limited company pays 22 percent tax on net lease income. If the shareholder personally chooses to withdraw their profit, dividends will be taxed at 37.84 per cent from 2023, a total of 51.5 per cent from 2023. If no such market rent is paid, as the shareholder you may be subject to dividend tax for the amount and the company withholding tax as if it had received rent.

However, if the private limited company’s property purchase cannot be justified as ordinary operations and strategy, but is mainly done to acquire the shareholder or their related parties a home, the risk of a large bill is high. In the Storhaugen Invest judgement, a principle was enshrined that taxation in such cases should be based on the alternative yield of the funds used to invest in the home/holiday home if this exceeds market rent. The difference between the intended alternative yield and market rent shall be taxed as dividends and the company shall be charged self-supply tax if the shareholder has not paid enough.

If this is not taken into account in the tax return, there may be significant additional tax to pay as well as a penalty.

The new bill on tax of private consumers, which was presented in 2022, went even further and is a tightening up of the already existing rules mentioned above. The basis for the bill is that the current rules are discretionary and contain difficult evidentiary assessments for the tax authorities, so there are many ways they can be adapted.

In simple terms, the bill states that personal owners and related parties who at some time during the fiscal year have directly or indirectly owned or controlled the company by at least 50 percent are covered by the rule. A template model was proposed for simply calculating on which benefit the shareholder should pay dividend tax and on which income the company should pay tax according to the self-supply rules. The way the bill was worded, there was no requirement for actual use, and what is new in the proposal is that the owner with control is considered to have a right of disposal to the asset throughout the year unless the owner can prove that it is actually rented out. Weeks in which the asset is not in use thus accrue to the owner and the owner must be taxed for the benefit that it is. For residential and holiday properties, the proposal was that the benefit should be set to 0.5 per cent per week of the highest of the market value and acquisition cost plus expenses. The bill received a great deal of feedback, and further work is now being done to clarify the new rules. How the rule will be formulated in concrete terms is still uncertain, but it is expected to represent a significant tightening to the current rules.

Profit from the private limited company’s sale of a home/holiday home is taxed at 22 per cent. There is no corresponding tax exemption rule for personal ownership and use. If the profit is distributed as a dividend, this is taxed at 37.82 percent, and the profit is thus taxed at a total of 51.5 percent.

A private limited company is not subject to wealth tax, but the home/holiday home is listed at 100 per cent of the calculated market value when determining the shares’ asset value that the shareholders pay tax on. For personally owned shares in the company, the valuation discount of 25 per cent is in 2023, which is significantly lower than the discount of 75 per cent that is achieved if the home is used and owned personally.

Summary of ownership for personal use
In summary, the main rule is that personal ownership of your own home and/or holiday is clearly preferable. This also applies where the capital is already held in a limited company, and where a taxable dividend must be paid to buy the property. This is due to the possibility of selling tax-free, but also because the setting the correct rent is difficult and can be very costly due to unclear tax consequences.

Buy-to-let

Buying as an individual

In principle, net income from rent and profits from the sale of buy-to-let homes (other residential property than your own home/holiday home) is considered taxable income from capital that is taxed at a rate of 22 per cent. Costs are deducted when calculating taxable income. In principle, maintenance costs can be deducted on an ongoing basis but must be limited to costs which must be added to the acquisition value and thus only deducted in the event of a taxable sale.

In order to avoid tax on profits, the owner can also take over the home as their own residence for a period before the sale, or give it away to their children so they can meet the accommodation and ownership time requirements.

In terms of wealth tax, a buy-to-let property, a so-called second home, is basically valued at a value equal to 100 per cent from 2023 of the market price. As with primary residences, the Norwegian Tax Administration sets the value on the basis of the area of the home and a square metre rate that represents a percentage of the calculated market value per square metre. If such a valuation gives too high a value, you can demand that the capital value of the second home is set at 100 per cent of the property's documented market value.

Full buy-to-let

However, if the rental activity is above a certain limit, the income will instead be counted as income from personal business activities that are taxed with a marginal tax of 50.6 per cent from 2023 instead of 22 per cent. This marginal tax rate is included in addition to the general tax rate of 22 per cent, personal income that provides the basis for bracket tax and national insurance tax of 11.2 per cent (from 2023).

The limit for when rental activity is considered as such is considered to apply when letting more than 4 properties for residential and leisure purposes in addition to one’s own residence. Spouses are assessed separately and can own and manage up to four buy-to-let properties each. If the limit is exceeded, all rental properties will be subject to business taxation.

The business limit is discretionary, but in practice not entirely symmetrical. For five or more, it’s difficult to avoid business taxation. On the other hand, in the case of effort-intensive properties, business terms may apply at lower numbers. In the case of short-term letting through Airbnb, it has been decided that business terms apply when letting two properties. A comprehensive and specific assessment must be made of a person’s overall letting of residential and commercial property etc.

When rent is taxable as capital or as business income, costs will be deducted when calculating net taxable income in the same way as mentioned above.

In terms of wealth tax, a 50 percent discount in 2023 will be given on the value of the assets if the rental property is considered a commercial asset. The asset value is then set equal to 80 per cent of the calculated market value. If such a valuation gives too high a value, it will be reduced to 80 per cent of the property's documented market value.

Purchasing buy-to-let property through a private limited company

Buy-to-let properties can also be purchased through a private limited company. Net rental income and profits are taxed in the company at a rate of 22 per cent. If a shareholder wants to withdraw their profits personally, a dividend tax of 37.84 per cent is triggered from 2023, and the total tax on the rental profit is thus 51.5 per cent from 2023.

If a person invests in multiple buy-to-let properties, the assessment will be 22 per cent tax on personal income up to a total of 51.5 per cent.

A person and a private limited company are their own tax entities, and the business limit for direct ownership is assessed regardless of whether the owner also owns property via a private limited company. In other words, in principle, a home, four ordinary buy-to-lets can be owned personally, and more buy-to-lets can be owned by a private limited company: This will typically also be the most tax-efficient order of investing.

For more extensive rentals, investment through private limited companies for 2023 will be taxed at 0.9 percentage points more than personal business. In previous years, this has been the opposite. However, investments through a private limited company are a clearly more flexible, because the shareholder can choose the time of the dividends and defer additional tax as well as reinvest in other assets via the company if desired. Deferred tax is reduced tax.

If the money is already in the private limited company
If funds are already in a private limited company, the question is whether these should be taken as dividends and invested in buy-to-let properties below the business limit under personal use, or whether all investments should be made via the private limited company.

As mentioned, the rental income will be taxed at 22 per cent, whether this occurs through a private limited company or as an individual when there is no business income. The difference is mainly whether the dividend tax of 37.84 per cent is charged initially for the purchase of the property or later on dividends from the company. In practice, the difference is not as large as you would think when all circumstances are taken into account, including tax paid on dividends or alternative yield on this. Long-term, expected returns and flexibility should determine the choice more than tax. However, private owners have the advantage that you can move in and make the sales profit tax-free. Transfer of inheritance can also be easier to carry out for private owners, and the children can use or sell the home with tax-free profits under the same residence and ownership period requirements as mentioned above.

Buy-to-let summary

In summary, in principle it is clearly most advantageous to invest in up to four buy-to-let properties personally, as the profits and rental income are considered investment income and are only taxed at 22 per cent earned. However, if the funds are in the company, this is not the same. This is especially true when the company has a long-term perspective and it is intended as a “piggy bank”. The investment strategy may change over time, and preserving the capital of the company gives more flexibility for alternative investments in the future.

When investing multiple buy-to-let properties in order to operate a business, private limited companies are normally preferable to operating as an individual, because the flexibility around withdrawals is greater and taxation can be deferred and reinvested in several properties or other assets. Prior to a choosing the type of ownership, we would like to remind you that when using debt financing, loan terms and prices may vary depending on whether you are taking out a loan as an individual or as a company.