Ask a tax advisor on the topic of Real estate taxation

Purchase of a second property B - Tax treatment of the loan interest when the existing property A is encumbered as a result.

July 26, 2019 | 40,00 EUR | answered by Steuerberater Knut Christiansen

We are planning to purchase a second property (B) - the notarization is planned. The property is currently rented out and the draft of the purchase contract mentions it as a capital investment with an undisrupted lease agreement. The handover of property B is flexible within this year.
We will finance the purchase price and the additional costs partially with the existing property A (newly built row house - relatively large and comfortable in a residential complex) up to the maximum limit (= using our own equity). As a side effect, the interest rates will increase, leading to higher proportional interest costs for the home office of my wife who is self-employed.
Property B (semi-detached house from the 50s - small house - high land value) will be burdened with the remaining (smaller) loan amount, and the interest will be calculated proportionally for the building against the rental income.

By the end of Q1-20, the situation may arise that the tenants of property B move out and we decide to use property B ourselves, while fully renting out property A in return. (Property B is located closer to my workplace, better connected to public transportation, and in a quieter area - which is why we prefer to move there).

Question: Please assess whether and under what circumstances the described increase in financing and thus in interest for property A can be tax-deductible as costs for the home office/rental income - what are the relevant judgments/guidelines to argue in case of a possible rejection by the tax office?

Steuerberater Knut Christiansen

Good day and thank you for your inquiry, which I would like to answer as part of an initial consultation.

Tax-wise, the loan always follows the purpose of use. This means that the interest on property A, which is used to finance property B, can only be used for property B. If property B is rented out, these interest expenses are considered advertising costs within the rental. If later there is personal use, the interest expenses would be deductible proportionally for the home office. If you later rent out property A, you can deduct the interest expenses for the loan used to finance A as advertising costs.

It is important to clarify that the interest incurred with a mortgage on property A does not automatically mean tax costs for A. The crucial factor is what you have financed with the loan (in this case: property B).

I hope this answers your question, otherwise feel free to ask for further clarification at no cost.

Kind regards,

Knut Christiansen
Tax advisor