The Treasury will allow the expense of canceling the mortgage to be deducted when it is paid with the sale of the home

The Treasury has been forced to change criteria in a key personal income tax deduction. A recent resolution of the Central Economic Administrative Court (TEAC) establishes that taxpayers who have sold their primary home and use part of those funds to pay off their mortgagethey can deduct that amount on their income tax return.

The resolution, advanced by the newspaper Expansion and to which he has also had access Economic Informationrefers to the deduction for investment in habitual residence. A tax benefit that was eliminated in 2013, but that can still be enjoyed by people who bought a house before that date or invested funds in its rehabilitation.

The change in criteria established by the TEAC—which is binding—opens the door for taxpayers who sold their primary home and used that money to pay off the loan to claim the deduction. A tax benefit that they took advantage of in 2023 (last year with tax data available) 2.7 million taxpayers.

On average, the amount of the deduction amounted to 358 euros per taxpayer in the state section of the tax and 361 in the regional section. The total impact on the treasury accounts was 1,953 million euros in 2023. If it is taken into account that tax years expire after four years, the TEAC resolution would allow for amounts not deducted between 2021 and the present to be claimed.

Nevertheless, Official Treasury sources reduce the impact of this measureconsidering that a very specific scenario has to occur in which many variables have to coincide. At the same time, it must be met that the mortgage is prior to 2013; that the sale of the home takes place with the corresponding use of the funds to pay off the loan and, at the same time, that in the year in question the limit of the deduction has not already been consumed (the maximum base is 9,050 euros).

Change of criteria

Until now, the Treasury argued that this deduction could not be applied to those who pay off the mortgage on their primary home with the money they obtain when selling it. “The right to apply said incentive cannot be recognized to taxpayers who, instead of acquiring, what they do is sell said home”argues the Tax Management Department in the allegations presented by the treasury.

The treasury interpreted that the deduction for canceling the loan was legitimate when one loan is replaced by anotherbut always maintaining the habitual residence. And he understood that, when the loan is paid off with the income from the sale of the apartment, what the taxpayer intends is to “transfer the home free of charge” and not the acquisition of an apartment to live in. “As of its sale, its acquisition is no longer being financed, quite the opposite,” it states.

The case that gave rise to the dispute is that of a Canarian taxpayer who sold his primary home and the mortgage cancellation expense financed with the funds obtained in the operation was deducted. The Tax Management Office of Tenerife opened a file on him considering that he was not entitled to it, but he complained to the Regional Economic Administrative Court (TEAR) of the Canary Islands.

The Canarian TEAR agreed with himbecause he understood that the amounts paid to cancel the loan “can be subject to deduction, since they must be considered that they are amounts invested destined for the acquisition of what constituted, until said date, his habitual residence and, therefore, meets the requirements demanded in said standard.”