Deductions for first-time homebuyers
If you have taken a loan to buy residential property as a first-time homebuyer, you may be entitled to higher deductions.
If you have no capital income during the tax year, you can get deductions for home-loan interest in the form of a credit for deficit. For interest on a first-time buyer’s home loan, the credit is 32%.
Interest on home loans is partly deductible
If you have borrowed money in order to buy residential property or to finance major repairs in it, you are entitled to partial deductions on the interest expenses. As a rule, interest expenses are deducted from taxes in the year in which they have been paid.
|Interest expenses paid during:||How much of the interest
If there is not enough capital income, the interest expenses cause a deficit
The part of interest expenses that qualifies for deduction is primarily deducted from the taxpayer’s capital income. If there is not enough capital income to make deductions from, the interest expense will cause a deficit. Part of it will be deducted from earned-income taxes. This is called a credit for a deficit in capital income, and for most taxpayers, the rate of the credit is 30%.
However, for interest on a first-time homebuyer’s home loan, the credit is 32%. You can get the higher credit rate the year when you move in to your new home, and nine years following that.
Example: Two spouses have bought a home as first-time buyers. They pay €1,000 a year in home-loan interest. Basically, for interest expenses paid during the 2020 tax year, €150 is deductible (that is, 15% out of €1,000). However, the couple has no capital income. The only way for them to deduct their home-loan interest is that they receive a credit for the deficit in capital income, which reduces their earned-income tax. The credit rate is 32% for home-loan interest paid by first-time homebuyers. In this case, their credit for the deficit will be €48 (or 32% out of €150).
The highest permissible credit is €1,400 per year. For couples, it is €2,800 per year. It is raised by a further €400 if you have a child under 18 years, and by €800 if you have two or more children. This way, the maximum of €3,600 can be credited from the tax on earned income in a family of four.
When is a home loan treated as a loan taken by a first-time homebuyer?
The special tax credit for first homes only applies to situations where money has been borrowed expressly for the purpose of buying residential property as a first-time homebuyer. Loans taken for major repairs in a home you have bought as a first-time homebuyer are treated as regular home loans.
Loans qualify for the first-time homebuyer’s tax credit if all the following conditions are fulfilled:
- After the purchase, you own at least 50% of the property.
- You live in the home yourself.
- You have not previously owned at least 50% of a residential property.
Ask for a revised tax card with a lower withholding rate to reflect the interest expenses
Interest expenses on a home loan can be included in the calculation of the withholding rate marked on your tax card.
Your bank gives the Tax Administration information on your loan and its interest expenses. This information is transferred to your pre-completed tax return. Check that the amount of interest is correct and check that the pre-completed tax return contains the right information on the purpose of your loan. If the loan purpose is not correct, enter the correct purpose (interest on a first-time homebuyer’s loan) and the bank’s code number for the loan in the additional information section.