Taxpayers cannot deduct the portion of an extended loan used for other purposes

The application of the deduction for investment in a primary residence under the transitional regime requires strict control over the destination of the financed funds. A recent binding ruling from the Dirección General de Tributos (DGT) focuses on situations where a taxpayer extends their mortgage loan to finance concepts other than the acquisition of their residence.

What the DGT has ruled

The advisory body has determined that the extension of a mortgage loan does not exhaust or extinguish the right to the deduction for the original portion of the loan, provided certain requirements are met. However, the criteria regarding the new capital are restrictive:

• Proportionality: Only the annual payments (both principal amortization and interest) that are attributable to the original portion of the loan intended for the primary residence will be deductible.
• Exclusion of the increase: The portion of the increase in the principal that has been used to finance concepts unrelated to the acquisition of the home will not be deductible.
• Burden of proof: To maintain the right to the deduction on the original portion, the taxpayer must accurately prove which part of the capital and the installments corresponds exclusively to the financing of the primary residence.

What this means for you

If you are entitled to the deduction for investment in a primary residence under the transitional regime and decide to request an extension of your mortgage for other purposes (such as purchasing a vehicle, unrelated renovations, or consumption), you must be aware that the tax benefit will be fragmented. The portion of the installment corresponding to the new extended capital cannot be included in the deduction base.

This scenario does not imply the total loss of the right to the deduction on the initial debt, but it does require very clear accounting and traceability of the funds to prevent the Tax Agency (Agencia Tributaria) from considering that the purpose of the investment has been undermined.

What you should do

In the event of a loan extension operation, it is necessary to perform a detailed breakdown of the debt. It is fundamental to keep documentation that allows for the distinction between the capital intended for the home and that intended for other purposes. It is recommended to evaluate the structure of the new debt to ensure that the deductible portion is clearly identified and can be proven in the event of a potential inspection by the Tax Agency.