Interest deduction after security exchange
March 16, 2011 | 30,00 EUR | answered by Michael Herrmann
I am living in a self-used condominium in Eichenau, for which I have taken out two loans with corresponding mortgages to finance. I have now purchased a 2-bedroom apartment for investment purposes from the proceeds of selling my retirement home in the Bavarian Forest. The apartment is being paid for 100% with my own funds. However, I was able to essentially swap properties (exchange securities) with one of the existing mortgage securities. From a processing standpoint, I agreed to a new mortgage deed (for the new property) and after the transfer of ownership, the original mortgage on the self-used property will be discharged. There is essentially no money flow, as the loan from the bank has already been paid out for the first property and the existing loan agreement continues. What do I need to consider when dealing with the tax office? I want to be able to claim tax deductions for the interest on the new loan now tied to the new property. Can I do this with the existing loan agreement, which was originally intended for the self-used property?
Dear inquirer,
First of all, thank you very much for your inquiry, which I would like to answer based on the information you provided and considering your involvement in an initial consultation. The response is based on the description of the situation. Missing or incorrect information about the actual circumstances can influence the legal outcome.
The deductibility of financing costs is determined not by the property being secured, but solely by the use of the loan.
Although your rented property is burdened with a mortgage or lien, if the loan is used for personal purposes, such as financing a self-occupied property, the interest and credit costs are not tax deductible.
To obtain future tax consideration, a new loan would need to be closely connected to the new purchase. This is unlikely after the completion of the acquisition. It would have been advisable to repay the old loan and take out a new loan for the financing of the new acquisition. The tax authorities require a strict separation of financing contracts in this regard.
I hope that these explanations have provided you with a sufficient overview of the situation within the scope of your involvement and this initial consultation, even though I could not provide favorable news, and I remain
Yours sincerely,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax advisor
