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Loan interest tax deductible?

The mandatory notification ensures that nobody can miss it: Borrowing money costs money. In most situations, interest must be paid on a loan. Where this is not necessary, that is just one more reason to pay attention: why would a company lend you money for free? Most people now know that mortgage interest gives a tax deduction. Less people are aware of the fact that interest on a consumer credit is sometimes tax-deductible.

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Own house

The mortgage interest deduction is actually a very wrong name. Tax deductions are not only possible for mortgage interest. And not all mortgage interest is tax deductible. What matters with the deduction is whether the borrowed money was spent on the owner-occupied home. For the purchase of the house, maintenance or renovation. Whether the loan is a mortgage, a personal loan or a loan from parents - it does not matter for the tax authorities.

Repayment schedule

It is important that the loan meets the tax requirements for tax deduction. Since 2013, a new loan has only been regarded as a home acquisition debt if it is repaid at least on an annual basis according to a fixed schedule within a maximum of 30 years. A revolving credit does not meet this requirement. A personal loan is. The interest on a personal loan that is used for the owner-occupied home can therefore fall under the mortgage interest deduction.

Home improvement

Are you going to renovate? A new kitchen, plastic frames, a dormer window, an extension, a new bathroom? If you borrow money for this, the loan interest may therefore be tax deductible. Even if you do not finance it with a mortgage. Depending on your situation, it may be more favorable to take out a renovation loan than a mortgage. Compare the options and costs carefully before making a decision.

Residual debt

There is another way in which the interest on a loan can be tax deductible. This is the case if the loan is used to finance a residual debt. A residual debt, that is the debt that remains when a house that is 'under water' is sold. The selling price is lower than the outstanding mortgage. So after the sale, a debt remains. This loan is not a real home acquisition debt - after all, there is no longer any owner-occupied home. Nevertheless, you can deduct the loan interest on a residual debt financing from your income for tax purposes. A temporary tax arrangement has been made for this - applicable for residual debts that arose after October 28, 2012 and before January 1, 2018. The deduction applies for a maximum of 15 years and requires no repayment during the term.
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