Taxpayers may maintain the primary residence deduction after expanding a mortgage loan

The right to the deduction for investment in a primary residence, under the transitional regime of the Personal Income Tax (IRPF) Law, remains intact even when a novation or expansion of the original mortgage loan occurs. This issue has been clarified following doubts as to whether an increase in the debt capital would cause the loss of the tax benefit.

What the DGT has resolved

The Dirección General de Tributos (DGT) has determined that the expansion of a loan does not exhaust the right to the deduction. The criteria establish that the taxpayer may continue to deduct the proportional part of the installments that is attributable to the original loan intended for the acquisition of the residence.

The resolution clearly distinguishes the destination of the funds:

• Capital intended for the residence: If the resulting new loan is used to amortize the previous loan, the deduction persists on the corresponding proportional part.
• Cancellation costs: If the expansion is used to cover the cancellation costs of the original loan, that part will also be subject to deduction.
• Other purposes: The part of the increase in the principal intended for different purposes, such as the purchase of land or carrying out renovations, will not be deductible.

What this means for you

If you are a taxpayer currently benefiting from the deduction for investment in a primary residence, an expansion of your mortgage does not imply the automatic loss of this right. The key lies in the traceability and the destination of the funds. The tax benefit is not lost simply because of having a larger debt; rather, it is fragmented according to the use made of the additional capital.

This implies that, in the income tax return, a calculation must be performed to separate the part of the installment that corresponds to the investment in the residence (deductible) from the part that corresponds to the expansion for other uses (non-deductible).

What is advisable to do

In the event of a mortgage novation or expansion operation, it is necessary to precisely identify the destination of every euro increased in the principal. It is fundamental to keep the documentation proving that the additional capital is used to amortize the housing debt or to cover cancellation expenses, as this guarantees the continuity of the deduction on the correct proportional part. The particular situation of the debt should be assessed to avoid errors in the application of IRPF regulations.