Tax deduction for investment in primary residence after mortgage substitution

The Directorate General of Taxes (DGT) has issued a relevant ruling for individuals under the transitional regime for the tax deduction for investment in the primary residence. The issue focuses on whether substituting a mortgage loan by canceling the previous one and contracting a new one leads to the loss of this tax benefit.

What the DGT has ruled

The administration has determined that substituting one loan for another does not exhaust the possibilities of applying the deduction. For this right to be maintained, the new loan must be specifically used to repay the previous loan. If the cancellation of the previous contract and the signing of the new instrument are carried out in a single act, the taxpayer retains the right to the deduction for the installments and interest paid.

Furthermore, the DGT clarifies that the expenses derived from this operation, such as appraisal, notary fees, and registration costs, are also eligible for deduction. However, there is an important limitation: the portion of the new loan used to finance concepts other than the residence cannot be subject to deduction.

What this means for you

If you are a taxpayer currently applying the tax deduction for investment in the primary residence and are considering changing mortgage lenders or restructuring your debt, this resolution offers legal certainty. Changing the loan does not pose an obstacle to continuing to apply the tax benefit, provided that the purpose of the new credit is the cancellation of the debt linked to the primary residence.

It is essential to keep in mind that the deduction will only apply to the portion of the debt that affects the residence. If the new loan includes a portion intended for other purposes, that fraction will be excluded from the deduction calculation.

What you should do

In the event of a possible mortgage restructuring, it is necessary to verify that the operation is carried out in such a way that the new capital is applied directly to the repayment of the previous debt. It must be correctly documented that the purpose of the new loan is the substitution of the primary residence mortgage to ensure the traceability of funds and compliance with the regulations of the Personal Income Tax Law (LIRPF) Law 35/2006. Each particular situation must be analyzed to confirm that all technical requirements for the deduction are met.