Taxpayers may maintain the primary residence deduction when novating their mortgage loan

Managing mortgage debt is a key financial decision that can have direct repercussions on your income tax return. A recent resolution from the Dirección General de Tributos (DGT) analyzes the continuity of the right to the deduction for investment in a primary residence when a novation or loan substitution operation is carried out.

What the DGT has ruled

The advisory body has determined that the cancellation of a mortgage loan and the contracting of a new one does not extinguish the right to apply the deduction for investment in a primary residence, provided that the capital from the new loan is used to amortize the previous debt.

However, the resolution establishes important nuances depending on the purpose of the new loan:

• Single purpose: If the new loan is used exclusively to amortize the mortgage on the primary residence, the right to the deduction is maintained.
• Dual purpose: If the new loan includes an increase in principal intended for other purposes (such as the purchase of other assets), the deduction will be applied proportionally only to the part of the capital attributable to the primary residence.
• Treatment of interest: Interest corresponding to the part of the loan intended for a rental property cannot be counted toward the deduction; instead, it must be deducted as an expense in real estate capital income, respecting the limit of the gross income obtained.

What this means for you

If you are a taxpayer currently benefiting from the deduction for investment in a primary residence, the possibility of renegotiating your mortgage conditions or replacing your current loan with a more favorable one does not mean the automatic loss of this tax benefit.

However, it is fundamental that the traceability of the money is clear. If you decide to request an increase in capital to finance other personal projects, the part of the mortgage that is diverted from the primary residence will no longer be subject to the deduction, affecting the proportional calculation thereof.

What you should do

Before formalizing a novation or a loan substitution that includes an increase in principal, it is necessary to perform a proportionality calculation. It is vital to distinguish which part of the new capital is strictly destined for the amortization of the primary residence debt to avoid errors in the Personal Income Tax (IRPF) return. Since each financial operation has particularities in its contract and purpose, it is recommended to assess each case individually to ensure compliance with current regulations.