The sharp turn that the European Central Bank (ECB) gave to monetary policy during the last inflationary crisis not only made variable and mixed mortgages more expensive, but also resurrected an old tax deduction that had been steadily declining in Spain for years. The increase in interest rates, triggered by Frankfurt’s offensive to try to slow down the increase in prices, led in 2023 to the first increase in more than 15 years in the tax cost associated with the deduction for the purchase of a first home, a benefit which the Government eliminated in 2013 and which, since then, has remained in a transitional regime.
The official data collected by the Revenue Agency clearly reflects the change in trend. After reaching its lowest point in 2022, with a collection cost for the Ministry of Finance of 1,843 million euros, the total amount of the deduction rose in 2023 to 2,268 million, with an increase of 23%. This is an unexpected rise in a historical series which, since 2008, has only seen declines.
The income tax deduction for investing in a first home has long been one of the most popular tax advantages in Spain. It allowed taxpayers to subtract 15% of the amounts paid each year for the purchase or financing of a main residence from the IRPEF rate, with a maximum base of 9,040 euros per year. Although the deduction was eliminated in 2013 in one of the adjustment plans of the Executive Mariano Rajoy, the legislator maintained a transitional regime for those who had acquired habitual residence before that date.
The elimination of the advantage for new purchases caused a progressive and constant decrease in the impact: from 6,138 million in costs for the Treasury in 2008 we gradually went to 3,438 million in 2013, to 2,170 million in 2019 and to 1,843 million in 2022. The trajectory was logical. Because the door was closed to new beneficiaries, the number of taxpayers eligible for the deduction diluted each year as they repaid the loan. Furthermore, the low interest rates and the stability of the Euribor have limited the amount of interest paid and, consequently, the deduction applied.
This trend completely stopped in 2023. The Euribor started the year strongly rising and ended it around 4%, which made new loans significantly more expensive and, at the same time, variable and mixed mortgages already underwritten years ago. The average installments of these credits have become more expensive and the increase has automatically increased the amounts deductible in the Irpef for taxpayers who were still entitled to this benefit.
The more than 2.2 billion euros that the Treasury stopped collecting in 2023 due to the deduction, as explained by José García Montalvo, professor of Economics at the Pompeu Fabra University of Barcelona, are a figure very similar to that recorded five years earlier. At the time, however, the Euribor was negative, while in 2023 it even exceeded 4%.
This effect of high rates would have neutralized, to a large extent, the natural decrease in the stock of mortgages with the right of deduction, which is reduced every year when loans reach their temporary limit or are repaid early, continues Montalvo. Furthermore, the rise in rates could have caused earlier cancellations, also affecting mortgages which remain tax deductible, albeit to a lesser extent and depending on the residual duration of the mortgage.
The deduction mechanism remains the same as before its suppression. Anyone who took out the mortgage before 1 January 2013 can deduct 15% of the amount paid during the year (principal, interest and related insurance), up to a maximum of 9,040 euros per year. The Treasury returns a maximum of 1,356 euros per taxpayer, or double if the declaration is submitted individually by the two loan holders.
Despite this rebound effect on the tax impact, the number of beneficiaries continues to decline and is today less than half of what it was at the end of the housing bubble, when around seven million claimants took the deduction.
In recent months, the Central Economic-Administrative Tribunal (TEAC), dependent on the Ministry of the Treasury, has adopted a more flexible interpretation of the deduction, modifying criteria that had previously been rather restrictive on the part of the Revenue Agency. Among the most significant innovations, the Court admitted in April last year that taxpayers who purchased their home before 1 January 2013 can apply the deduction to payments made in subsequent years, even if they had not requested it in previous years, as long as they were not required to submit a tax return due to insufficient income.
TEAC also recently clarified that canceling the mortgage loan with the money from the sale of the property can be considered a deductible investment, which opens the door to possible returns. So far the Treasury has limited the deduction only to commissions paid up to the day before the transfer.
