A person has the right to deduct interest payments for a loan taken for acquiring a house or apartment for himself or herself. If a person does not use the housing acquired for his/her own residence, for example, the dwelling is let out on hire or used in business activity, no tax incentive on housing loan interests shall be used.
The loan or finance lease interest payments made upon acquisition of only one house or apartment may be deducted from the taxable income at any one time.
Acquisition means also the erection, expansion and remodelling, modification of utility systems of construction works, changing the division of spaces in construction works and the building and installation work related to the technical refitting of construction works on the basis of a building permit or building design documentation. A building permit is issued by the local municipality or another competent authority and is entered in the state register of construction works.
NB! Upon making ordinary repair works (redecoration) there is no right to deduct housing loan interest from income.
- The right to deduct has only the person who is both the borrower (the main borrower or co-borrower) and also the owner of the housing.
The right to deduct interest payment shall not apply to the guarantor of a loan, even if he or she is the owner of the housing.
If there is a joint or common ownership of the housing (i.e. there are two owners of one housing) and both persons are also the loan applicants, in such case both persons may declare the housing loan interest and deduct it from their income in proportion to the part of ownership.
Upon transfer of a housing where the loan interests are deducted from the taxpayer's income, the person will be deprived of the right to deduct interest as of the date of the transfer of housing, i.e. from the date when the ownership is transferred to another person.
If a taxpayer deducts interest on a housing loan or lease taken before 1 January 2005 for acquiring a housing for his or her spouse, parents or children and has acquired the housing for himself or herself for a loan after 1 January 2005, the taxpayer has an option: which of the interests to deduct from his or her income. The interest payment for a loan or finance lease taken for acquisition of only one housing may be deducted.
If in the same year the loan contract on acquisition of one housing is terminated and a new contract for acquisition of another housing is concluded, the interest payments of both contracts may be deducted from income. It is applicable on a precondition that the interests are not paid at the same time.
Pre-declared data upon declaration of the housing loan interests
In the case of the loans taken as of 2005 the borrower may deduct the interests from income only when the housing was bought for the person himself or herself.
For borrowers an opportunity in the internet banks environment will be made to submit data about paid housing loan interest to the Tax and Customs Board. Data submitted does not include information for whom the housing was bought. For that reason data about paid housing loan interest is shown in every borrower´s pre-completed tax returns.
If a borrower has not obtained the housing for his/her own residence, for example, the dwelling is let out on hire or used in business activity, he/she must delete the data about loan interests from his/her electronic income tax return or make a relevant correction in the tax return filled in on paper before.
Evidence of the intended use of a housing loan
The Tax and Customs Board may ask you to provide some additional evidence for checking the intended use of a housing loan, if necessary. We advise you to maintain all relevant documents.
If a taxpayer fails to provide any evidence, the tax authority may refuse tax incentives.
The right to deduct the housing loan interests in the event of construction works is certified by a copy of a building permit or building design documentation.
The aforementioned documents need not be enclosed to the income tax return but they must be submitted at the request of the Tax and Customs Board.
If the housing loan was not fully used for acquiring a housing
If the housing loan was not fully used for intended purposes, the taxpayer must enter the percentage (%) of intended use and the appropriate amount of interest in table 9.2 on the housing loan interest of the form A of the income tax return.
Percentage of the intended use of the housing loan must also be entered, if in addition to a loan taken earlier, an additional loan was received which is not used for building or remodelling of the housing on the basis of the building permit or building design documentation.
A borrower has used the earlier loan for intended purposes – he bought an apartment as a housing. In September he took an additional amount of loan of 6400 euros. He used this money for repair works where the building permit or building design documentation was not required. For it is not possible to deduct the interest on the part of loan that was taken for repair works, the percentage of the loan used for intended use must be calculated.
The amount of the remaining loan before receipt of an additional loan is 16 000 euros, the remaining loan together with the additional loan is 22 400 euros. Percentage of the loan used for intended purpose is calculated as follows: 16 000 / 22 400 x 100 = 71,43%. Interest on a loan paid before the receipt of an additional loan may be deducted 100%, while from September 71,43% of the loan interest may be deducted.
Declaration of interests and refund of income tax in case of co-borrowers
Cohabitants acquire a housing for a joint loan. One of cohabitants is a borrower, the other is a co-borrower. They both are owners of the housing in the equal proportion of 50%. Interests will be paid and the loan will be repaid from one person's bank account.
The right to declare interest payment and deduction applies to both persons in the proportion of 50%. One person cannot declare full payment of interest for he or she is not 100% owner of the housing. (If the persons who took the loan are spouses and this is a joint property, the payment of interests may be declared on one tax return.)
Cohabitants acquire a housing for a loan. The borrower is one of them, while they both are owners of the housing in the proportion of 50%.
The right to deduction of interest payment applies only to the person who is the borrower, and only 50% of the interest payment may be deducted. The remaining 50% of interest cannot be declared because half of the housing is not the property of the borrower. The other person is not the borrower, but being a borrower is a precondition for application of tax incentive.
Cohabitants acquire a housing for a loan. One person is the owner of the housing, while the other person is the borrower.
Neither of them has the right of deduction. Although one person is the owner of the housing but he or she has not taken the loan in connection with the housing. The other person has taken a loan but he or she does not own the housing for acquisition of which the interest payment on loan could be deducted from income.
A married couple has acquired a housing for a joint loan – one of the spouses is the borrower, the other spouse is the co-borrower. The housing is their joint property but it is registered on one spouse's name.
On the joint tax return of the spouses the interests may be in 100% deducted from income. On the tax returns submitted separately, both spouses may deduct the interest payment from their income, keeping in mind that the total amount of the interest declared by spouses cannot exceed the amount of interest paid to the bank.
A married couple has bought two apartments. For acquisition of both apartments a housing loan was taken. The married couple uses only one apartment for their own place of residence while the relatives live in the other apartment.
Only the loan interests paid for the apartment used as the place of residence of the married couple may be deducted from income. The loan interests paid for the apartment at the disposal of their relatives may not be deducted from income.
The spouses acquire a housing, where the borrower is one of the spouses and the housing is separate property of the other spouse.
On the joint tax return of spouses the interests of the housing loan may be declared. When declaring it separately the borrower and the owner of the housing must be the same person.