Deducting interest expenses - abuse of tax planning
May 10, 2011 | 30,00 EUR | answered by Michael Herrmann
Interest deduction received - abuse of design
Initial situation:
Two existing mortgage loans, secured by a property in private ownership.
For one of these loans, the interest deduction (subsequent advertising costs) from a former, no longer existing business operation is recognized by the tax office.
Consideration:
Sale of the property used to secure the loan
-Payment of the mortgage loan for which no interest deduction is recognized.
-Temporary security exchange for the mortgage loan for which the interest deduction is recognized through savings deposit/building society contract from the proceeds of the property sale while continuing to pay the interest and repayment rate.
Acquisition of new property:
After 2-3 years, acquisition of a new property and use as security for the remaining loan. Extension via building society contract.
Justification for tax office:
Savings on prepayment penalty
Cheaper follow-up financing through building society contract
Interest income during waiting period
Advantage:
Interest deduction remains
Questions:
Is there a risk of abuse of design and therefore the loss of the possibility of interest deduction when implemented?
If so, what alternative would there be to maintain the interest deduction?
Dear inquirer,
First of all, thank you for your inquiry, which I would be happy to answer based on the information provided and in the context of your initial consultation. The response will be based on the facts presented. Missing or incorrect information regarding the actual circumstances can affect the legal outcome.
The deductibility of interest expenses for tax purposes depends solely on the purpose for which the loan is used. It is generally irrelevant which asset secures the loan, as the burden of an asset as security for a loan does not establish an economic connection on its own.
Interest expenses for liabilities that remain uncovered until the complete termination of a business, despite the utilization of the assets, are considered subsequent operating expenses, even if the liabilities are secured by mortgages on a private property or if refinancing has been carried out. Therefore, the business interest expenses remained deductible.
The use of the proceeds from the sale of private assets does not have a business-related connection. It is not necessary for private assets to be used for early debt repayment, regardless of whether there is sufficient liquidity available through the sale or otherwise.
Furthermore, the use of the proceeds from the sale does not affect the recognized business reason for the original loan. The same applies to the intended future collateral.
My assessment applies solely to cases where the security property is undeniably and reliably identified as private assets.
I hope that these explanations have provided you with a sufficient overview of the situation within the scope of your inquiry and this initial consultation, and I remain
Yours sincerely,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax Consultant
