Can I deduct the interest on a loan from the Personal Income Tax?

One of the most frequent doubts that arise when applying for a loan is knowing if your interests can be deducted on the income statement. If you want to resolve this question and know if you can deduct the interest on a loan from the personal income tax, you have come to the right place. 

Can the interest on a loan be deducted from personal income tax?

Can the interest on a loan be deducted from personal income tax?

Year after year, once we start generating enough money, we have to make the Income Statement. And one of our obsessions is without a doubt locating those cats that are deductible from personal income tax (IRPF). It is for this reason that many people wonder if the interest on a loan can be deducted.

And unfortunately we have to give you bad news: in most cases these taxes are not tax deductible. Why is this so? Well basically because when we request this money it is not considered as an income in the income statement. And not being it cannot be deducted. Since it does not mean an increase in our capital, we cannot make a profit when making the income statement.

But this is not always the case. There are certain types of loans whose interest can be deducted year after year. Let’s see in which cases it happens.

Cases in which I can deduct the interests of my loan in the Personal Income Tax

For real estate capital returns

As long as you apply for a loan with the intention of making an improvement to your usual-use home, you can deduct the interest on the income statement. Yes, you read it right. If you decide to make a reform and request a loan or if you want to change the bathtub for a shower tray, all the interests of those loans are deductible. Regardless of which way you request them. Either through private lenders, loan companies or your bank.

In loans for the acquisition of commonly used housing

If you have bought your home before January 1, 2013 you are one of the lucky ones since in this case you will be able to deduct the interest on your loan. But, be careful, you can only deduct in the case of mortgage loans and not for specific expenses associated with your home. For example, if you have applied for a loan to face the mortgage in a specific month, it will not be deductible.

The controversial case of family loans

The controversial case of family loans

One of the most frequent doubts that arise is when we make loans between family members. Is it necessary to declare them? Everything will depend on the type of loan in question. Let’s look at it more calmly below.

  • If it is a loan between family members, we would find capital that is free from the Inheritance and Gift Tax. For what reason? Because the money that you have been offered has to be returned. It may have no interest, but sooner or later you will have to return it to its owner. In these cases, and to avoid these loans being considered covert donations, it is best to write a contract between both parties. In this contract everything has to be recorded. From the principal, the interests (even if they are at 0%) and the stipulated repayment period. To avoid problems, the contract must be legalized through the Tax Agency.
  • If they are donations you will not have to declare the money since it is a donation and not a loan. What is the difference? Basically this type of capital lacks return. In other words, we are not going to have to return it to our relatives, but they have given it to us completely free of charge to help us. Donations, however, are subject to Inheritance and Gift Tax.

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