Owners of rented properties cannot deduct interest if they cancel their mortgage with own funds

The deductibility of mortgage loan interest in Personal Income Tax (IRPF) requires strict compliance with requirements linking it to the investment in the property. A recent resolution from the Dirección General de Tributos (DGT) focuses on the importance of financial traceability when deciding to replace one debt with another.

What the DGT has ruled

The inquiry analyzes the possibility of deducting interest from a new mortgage loan when the previous loan, linked to the acquisition of a property intended for rental, has been fully canceled with own funds. The Administration's criterion is clear: for the interest on the new debt to be deductible, there must be a direct succession or a financial concatenation between the cancellation of the original loan and the signing of the new one.

If the owner uses their own funds to settle the previous mortgage, the financial traceability with the acquisition of the property is broken. In this scenario, the new loan is not considered invested in the acquisition for the purposes of current regulations, which prevents the application of the expense deduction.

What this means for you

If you are an individual who owns rented properties and manages the financing of these assets, this criterion directly impacts your net profitability. If you decide to cancel your current mortgage using personal savings and subsequently request a new loan for another operation or to reorganize your debt, you run the risk of losing the right to deduct the interest of that new financing in your IRPF tax return.

The key is not just the existence of a new loan, but the ability to demonstrate that this capital is directly linked to the initial investment in the property. The interruption of the flow of funds through the use of own capital acts as a breaking element that the Tax Agency uses to deny the deduction.

What is advisable to do

In the event of a possible restructuring of mortgage debt for properties intended for rent, it is necessary to analyze the continuity of the funds. Before proceeding with the cancellation of a mortgage using own funds, one must assess the tax impact that contracting a new debt will have and whether it will maintain the necessary link with the original investment to comply with the provisions of the Personal Income Tax Regulations.