Deductibility of interest on mortgage loans after 1 January 2021
On 1 January 2021, an amendment to the Income Tax Act entered into effect, reducing the annual limit of interest paid on mortgage loans or building savings loans to be deducted from the tax base from CZK 300 thousand to CZK 150 thousand. Uncertainty regarding the deductibility of this interest was discussed by the Coordination Committee of the Chamber of Tax Advisors and the General Financial Directorate.
Uncertainty arose primarily in connection with the amendment’s transitory provisions, in particular with the term ‘procurement of own housing needs’. This term is essential for determining whether the taxpayer may deduct from the tax base interest paid on a mortgage loan under the legal regulations in effect until the end of 2020, i.e. CZK 300 thousand (CZK 25 thousand a month), or whether they must proceed in accordance with the new legal regulations and deduct only CZK 150 thousand (CZK 12.5 thousand a month).
This question mainly concerns taxpayers who at the end of 2020 and the beginning of 2021 commenced activities leading to the procurement of a housing need, e.g. in 2020, they entered into a mortgage loan contract to purchase a flat/family house or filed an application for a building permit but the permit was not granted to them before the end of 2020, etc. According to the conclusions of the Coordination Committee, the GFD is of the opinion that the conclusion of a contract itself cannot be confused with the procurement of a housing need; procurement of a housing need is connected with the transfer or transition of the ownership title to the real property recorded in the Real Estate Register, or the fulfilment of the statutory characteristics/defining features of individual types of housing needs as stipulated in the Income Tax Act.
For example, for the acquisition of a plot of land for valuable consideration, the decisive moment at which the housing need is procured shall be the date the ownership title is entered into the Real Estate Register. The amendment has changed the moment from which the four-year period for commencing the building of a housing need starts to run from the date the loan contract is concluded to the date the ownership title to a plot of land is acquired. Consequently, if the ownership title is entered into the Real Estate Register before the end of 2020, the four-year period will start to run from the date the loan contract was concluded (i.e. pursuant to the previous legal regulation) and the taxpayer will be entitled to deduct interest of a maximum of CZK 300 thousand a year.
For the building of a block of flats/family house or unit, the decisive moment for claiming a deduction is the date a building permit or a joint permit is issued or the date the construction is notified; after the completion it is necessary to have an extract from the Real Estate Register available. If a building permit was not issued before the end of 2020, the new rules shall apply to the deduction of interest on a mortgage loan, i.e. it will be possible to deduct only CZK 150 thousand a year.
Where the maintenance of and changes to the construction of a block of flats, family house, flat in lease or use, unit are concerned, according to the GFD, the decisive moment of the procurement of a housing need shall be the date the reconstruction physically started. It is the taxpayer’s duty to support this with sufficient documentation, e.g., a contract with a supplier on commencement of construction work, etc.
According to the GFD, refinancing represents a special situation when a new loan is only linked to a previously concluded to which the same conditions under the Income Tax Act apply, i.e. that the housing need must be acquired before the end of 2020. If the housing need was procured before the end of 2020, the original conditions shall stand and the option to deduct interest of CZK 300 thousand a year shall apply despite the fact that the loan refinancing took place only after 1 January 2021.
How to sum up the above conclusions? Unfortunately, the Coordination Committee did not find common ground on this matter and was unable to convince the state administration that the new legal regulation may in practice cause serious application problems with negative effects for taxpayers. The state administration’s interpretation mostly links the moment decisive for claiming the deduction from the tax base to another moment, connected with a decision of another administrative body that may easily be delayed. This approach is quite unfortunate from an income tax act perspective and is likely to cause many problems in practice.