Main residence tax deduction: replacing a mortgage with a family loan

The Directorate General of Taxes (DGT) has issued a relevant ruling for individuals applying the tax deduction for investment in their main residence under the transitional regime. The inquiry addresses the situation of taxpayers who decide to replace their original mortgage loan with a new form of financing, such as a loan from a family member.

What the DGT has ruled

The body has determined that the novation or substitution of one loan for another does not imply the conclusion of the financing process nor does it exhaust the possibility of applying the deduction. According to the interpretation of Law 35/2006 on Personal Income Tax (IRPF), the right to the deduction is maintained for the amounts paid through the new loan, provided that these correspond to the proportional part attributable to the amortization of the original loan intended for the acquisition of the residence.

The resolution emphasizes that it is irrelevant whether the new financing is personal or from a third party, or if the capital comes from a family member. The determining factor is the destination of the funds and the continuity of the amortization of the capital intended for the housing.

What this means for you

If you are entitled to the main residence tax deduction and decide to restructure your debt, you will not automatically lose this tax benefit. However, it is necessary to distinguish the use of the funds:

• Housing amortization: Amounts used to cover the original housing debt will allow the deduction to continue being applied.
• Other purposes: If the new loan includes a portion of the principal intended for purposes other than the acquisition of the residence, that specific portion will not be deductible.

What you should do

In an operation of this type, it is fundamental to maintain clear traceability of the funds. It is necessary to document that the part of the new loan destined for the amortization of the previous mortgage debt is what generates the right to the deduction. It is recommended to assess each particular situation to ensure that the non-deductible part of the new principal is correctly segregated in the income tax return.