Section 6: Property owners
6.3. Changes while owning property
6.5. Tax and other accommodation forms
6.1. Buying property
Registration fee on the title deeds
When the purchase agreement has been signed, the title deeds of the property are required to formally transfer the house from the seller to the buyer. Making changes in the land registry costs a fixed fee of DKK 1,400 per document. 0.6% of the purchase price is also payable. If the purchase price is less than the official assessment, 0.6% of the assessment is payable.
Initial expenses or transfer expenses regarding loans
It is only a small minority of people who can pay for property in cash. Most property deals require the buyer to take out a loan. When taking out a loan you need to pay a registration fee (mortgage deed stamp). The fee is 1.5% of the loan amount in addition to the fixed fee of DKK 1,400 per document.
6.2. Being a property owner
Tax relief on interest
Interest payments can be deducted when calculating capital income.
When you pay interest on a property loan, the tax authorities are informed of this, regardless of whether it is a mortgage loan or a bank loan. This makes it easier to file the income tax return. The tax authorities receive the necessary information and can calculate the correct amount of tax.
A fall in the value of tax relief on interest
The value of the tax relief on interest was reduced in the 1999 tax changes (the Whitsun tax package). From 2001 interest tax relief was not taken into account when calculating the various income taxes to the state. The current tax relief on interest has a taxable value corresponding to the municipal taxes of approximately 33%.
Property value tax
A property assessment forms the basis of various forms of tax including the property value tax, where tax is calculated based on the value of the property, and the municipal property tax (land tax), where tax is calculated based on the value of the land.
Every other year properties in Denmark are assessed. The assessment determines the property value and the land value for each property. The property value is an estimate of the property’s cash price if it were it to be sold. The land value is the value of the land in an unimproved condition. Various factors are taken into account when properties are assessed, such as the location and what it can be used for. In the years where property is not assessed by the tax authorities, the fixed values are regulated based on the development of property prices in the period following the most recent assessment. Effective in 2007, there are no longer annual revisions. Hereafter, the normal property evaluations, that are made every other year, constitute the tax bases for two consecutive years.
Taxation of property value
Property value tax is not part of income tax but the calculated property value tax is collected with income taxes and is included on the tax card, which forms the basis for the tax that the employer withholds when paying wages.
As a starting point, property value tax is 1 % of the part of the property value that does not exceed an amount of DKK 3,040,000 and 3 % of the rest. Property value tax is therefore progressive.
Two interim arrangements allow reductions in property value tax for property owners who took possession of their property before July 1st, 1998.
These owners firstly receive a reduction in the calculated property value tax to the value of 0.2 % of the property value. This means that the owners in question must pay 0.8 % of the property value tax on the part of the property value that does not exceed the progression limit of DKK 3,040,000 and 2.8 % on the rest.
Furthermore, these owners receive a reduction in the calculated property value tax of 0.4 % of the property value, although to a maximum of DKK 1,200. The types of property that are entitled to these reductions are mainly the same types of property that were previously entitled to a standard allowance for things such as maintenance. This means that owners of owner-occupied apartments and owners of certain listed properties do not receive the reductions in question.
The two reductions mentioned above are discontinued on change of ownership.
There is also a reduction for old-age pensioners. The reduction in the calculated property value tax is 0.4 % of the property value, although to a maximum of DKK 6,000 for homes and DKK 2,000 for summer cottages. In 2008 these reductions are regulated and reduced proportionate to income: single pensioners with an income over DKK 169,000 and for married pensioners 260,000 DKK.
Tax freeze for property value tax
In 2002 a stop was put on any increases in property value tax. On introduction of the tax stop, the calculation basis for property value tax was frozen in 2002. The basis for the freeze is the 2001 assessment with a 5 % supplement. However, if the 2002-assessment, or the assessment on the 1st October in the income year, is lower than this figure, the lowest assessment is used as a calculation base.
The basis for property value tax can never exceed this ceiling. If property values fall, so that the current year’s property assessment is under this ceiling, the property value tax is calculated based on the current year’s property assessment. If property values later rise, the calculation base will be able to rise again but only up to this fixed ceiling.
According to the current rules, property values are taxed over a progression limit of 3%. This limit has now been frozen to DKK 3,040,000. This freeze also applies even if house prices fall.
Ceiling on buying and selling property
If a property is sold, the new owner assumes the previous owner’s ceiling for the basis of property value tax.
The new owner does not assume the special reductions that the previous owner may have had because the property was bought before 1st July 1998.
Ceiling for conversions, extensions and new building etc.
If a property later undergoes a conversion or extension requiring planning permission, the calculation base for the ceiling is increased so the basis corresponds to the lowest of the following amounts: 1) the amount the changed property would have been assessed at in 2001 with a 5% supplement, 2) the 2002 value of the changed property, or 3) the value of the changed property on the 1st October of the income year. This also applies if the property’ s size changes or if the property changes in use. If the owner lives there both before and after the changed use of the property, the changed use does not come into force until the property is sold.
For a new building, the calculation base of the ceiling is calculated so the basis corresponds to what a similar property would have been assessed at in 2001 with a 5% supplement, what it would have been assessed at in 2002 or what it would have been assessed at on the 1st October of the income year. In practice, this means that the assessment authorities assess the property according to the rules that applied for the 2001 assessment, for the 2002 assessment and for the income year. They then apply the lowest assessment.
Limiting property value tax rises from year to year
The full extent of the limitation rules has been reduced due to the implementation of the ceiling over property value tax. There is still a need for these rules in cases where the value of the property had fallen below the ceiling for the evaluation basis only to rise again, or in such cases where the evaluation basis rose to conversions or extensions that required a building permit.
The municipal property taxes (land tax)
The land tax is 0.1 % of the value of the land to the municipality. The municipalities themselves set the land tax, which property owners in the municipality must pay. However, it must be between 1.6 % and 2.4 %. Land tax is lower for agricultural and forestry lands.
The average county and municipal land tax is approx. 2.4 %.
As a property owner, in addition to land tax and other expenses to the municipality there are expenses for services such as refuse collection. Refuse collection charges are often levied with property tax. But expenses for refuse collection are exclusively based on user charges and have nothing to do with the tax system. It is just more practical to collect the amounts at the same time.
Environmental taxes are paid on consumption of electricity, water and heating.
The use of environmental taxes increased during the 1990s. However, income generated by the environmental taxes is used to ease income taxes.
| Environmental taxes, including CO2 tax, constitute: | |||
| 2008 level | Energy tax | CO2 tax | Total environmental tax |
| Oil, for heating, DKK/l | 1.89 | 0.25 | 2.14 |
| Natural gas, DKK/m3 | 2.08 | 0.20 | 2.28 |
| Electricity, for heating, DKK/kWh | 0.52 | 0.09 | 0.61 |
| Electricity, for other purposes, DKK/kWh | 0.59 | 0.09 | 0.68 |
| Water, DKK/m3 | 5.00 | - | 5.00 |
6.3. Changes while owning property
Conversion or extension
If the property is converted or extended, the value of the property will typically rise. This rise in value will affect the property assessment, which will subsequently affect the property value tax calculation, if reconstruction or expansion required a permit planning.
If the conversion or extension is financed with loans, it will affect taxable income because the tax relief on interest will increase.
Changes in use, such as rental
If the use of the property is changed, for example by renting it fully or partially, this will also affect tax.
If a property is rented out, it becomes a commercial business. This means that the owner will both be taxed on the rental income, and receive tax relief for the expenses incurred with running and maintaining the property.
If rooms are rented out as accommodation, for example to students, the rent income is tax free as long as it does not exceed a basic allowance.
The basic allowance is 1 1/3 % of the value of the property, although always a minimum of DKK 24,000. The basic allowance remains unaltered even though the property is only rented out for part of the year. If the rental income is greater than the basic allowance, the excess must be included in your income. If the basic allowance is used, there is no tax relief for other expenses. The owner can also decide to make an assessment of rental income and expenses but then he or she will not receive the basic allowance for the rental income.
It is also possible to change the use of the property by using part of it for business, for example a hairdresser’s salon. This also changes the owner’s tax status. First of all, property value tax decreases because the business part of the property is not included in the calculation.
Changes in financing
If changes are made in how a property if financed, for example if interest rates have fallen and it becomes advantageous to refinance, this can have various consequences for tax.
Firstly, the new loan will mean different interest expenses. Especially when refinancing to low interest loans, it is important to be aware of what this means for the net expenses for the property. The fact that less interest is paid also means that less tax relief on interest is received.
Secondly, capital gains are taxed in special circumstances. These are 1) if a cash loan is paid off in the property before time and a profit is made on it, although not through the property sale, 2) if the credit association or building society requires it, or 3) if a surviving spouse takes over the property in connection with administration of the estate or undivided possession of the estate. The capital gain is created when there is a difference in the price paid for the loan and the price at which the loan is redeemed.
Tax is not paid on capital gains on debenture loans.
Finally, refinancing can mean that a registration fee must be paid on the difference between the old and the new loan if the new loan is larger than the old one. This is 1.5% of the difference plus the fixed registration fee of DKK 1,400. If on the other hand, one mortgage loan (or loan similar to a mortgage loan) is exchanged for another of the same size, only DKK 1,400 is payable.
Taking out a top-up loan is treated in the same way as a normal loan. A registration fee of 1.5% of the loan amount must be paid together with a fixed fee of DKK 1,400.
6.4. Selling property
According to the so-called detached house rule, the profits are tax free on the sale of one-family or two-family houses, owner occupied apartments, housing cooperative apartments and weekend cottages when the owner has lived in the property fully or partially throughout the ownership period. However, this exemption is in most cases subject to the property’s plot size being less than 1,400 m2. The majority of properties in Denmark have a plot size of less than 1,400 m2.
As profits made on the sale of typical owner-occupied properties is not taxable, neither can any losses be deducted.
6.5. Tax and other accommodation forms
Tax is also significant when purchasing a housing cooperative apartment or a weekend cottage.
Housing cooperatives
If a person chooses to buy a property in a housing cooperative, he or she is not a traditional property owner. Instead the person “rents” from the housing cooperative association who owns the property. From the point of view of tax, this means that the housing cooperative association has the right to tax relief on interest. The housing cooperative association can make use of the tax relief on interest if it has taxable income.
Property value tax is not paid on housing cooperative properties.
Sales of housing cooperative apartments are covered by the detached house rule and any profits are therefore tax free.
Weekend cottage
As an owner of a weekend cottage, a person must pay property value tax on the property in the same way as with regular property.
If a person rents out his or her summerhouse, the rental income is taxable. However, there is a tax allowance for expenses incurred running and maintaining the weekend cottage.
A person can choose to make a statement of expenses so the actual expenses are deducted. Tax deductible expenses are, for example, expenses for furniture, fittings, household effects and property taxes.
But the tax rules also allow for a more simple way of administering the weekend cottage – through the standard allowance.
For weekend cottages that are only rented out for part of the year, the basic allowance is DKK 7,000. Thereafter, there is an allowance of 40 % of the gross rental income after the allowance of DKK 7,000.
If a person has chosen to deduct the actual expenses, he or she must continue to do so. The person cannot at a later date choose to use the simper standard allowance.
In both cases, regardless of the calculation method, the allowance can never be more than the gross income.
When the weekend cottage is sold, any profits are tax free according to the detached house rule, provided that the owner and his or her household have used it for private purposes for part or all of the ownership period.