Deductibility of loan interest when the primary residence is used as collateral

A recent binding ruling from the Dirección General de Tributos (DGT) has clarified a common scenario for owners of properties intended for lease: the possibility of deducting loan interest in the Personal Income Tax (IRPF) return when the collateral provided for said loan is the taxpayer's primary residence and not the rental property itself.

What the DGT has ruled

The issue raised focused on whether the fact that the asset guaranteeing the loan is the lessor's primary residence prevented the deductibility of interest from real estate capital income. The DGT has ruled that the collateral provided is not a determining factor in preventing this tax right.

The criteria establish that, for interest to be deductible, the taxpayer must meet two fundamental requirements:

• Proof of the use of capital: It must be demonstrated that the loan funds were used specifically for the acquisition of the property intended for rent.
• Justification of repayment: It is necessary to prove the repayment of said capital through the means of proof admitted by law.

Therefore, using the primary residence as collateral does not block the application of current regulations, provided that the causal link between the loan and the real estate investment is maintained.

What this means for you

If you are an individual who rents out properties, this criterion confirms that the collateral structure of your financing does not nullify your right to reduce the taxable base of your real estate capital income. The focus of the Tax Administration is not on which asset guarantees the debt, but on the effective use given to the borrowed money.

This scenario is relevant for those owners who, due to banking conditions or solvency reasons, have had to mortgage their primary residence to finance the purchase of a second home intended to generate income.

What you should do

To ensure the correct application of this criterion in the event of a possible inspection, it is fundamental to maintain impeccable traceability of the operation. It is necessary to have documentation that directly links the entry of capital into the account and its subsequent disbursement for the purchase of the rented property. Proper management of documentary evidence is the key to validating the deductibility of these financial expenses.