Can You Claim Mortgage Interest Deduction?

Can You Claim Mortgage Interest Deduction? - When interest expense generated by the mortgage can create tax savings: conditions and limits to correctly fill out your 2020 tax return.

The current tax law provides for the possibility of deducting 19% of the interest expense and related ancillary charges generated by a mortgage on tax returns. This facility, which has been modified several times over the years, is regulated with a number of limits that restrict the scope of implementation both in accordance with the type of building (main dwellings, secondary dwellings or non-residential buildings) and according to the year in which the mortgage agreement was entered into.

• Mortgages: What's Happening to Interest Rates?
• Mortgage Loan Agreement, How it Works?
• Mortgage Life Loan: Signed the Implementing Decree
• Better Have a Home Loan or Mortgage to Renovate?

As for the type of building, only the main dwelling allows the deduction of interest. As a result, you will not be able to benefit from this benefit when taking out a mortgage on a home where you do not live, such as a second home purchased for the holidays. So let's try to understand what are the rules that allow the deduction of interest:

• The necessary conditions;

• Limits: maximum cap achievable;

• The limits for deductibility;

• All documents to be kept in order to obtain the deduction.

The necessary conditions

The legislation stipulates that it is possible to deduct interest expense that arises solely in the dependence of a mortgage contract secured by the mortgage on the property itself, thus excluding any other financing contract. In addition, the home loan must meet the following three conditions:

1. a member of the Italian or a Member State of the European Community. The mortgage holder may also be extra-community but must still have a stable organization in Italy;
2. The contract must have been entered into for a maximum of one year before the purchase of the property or can be entered into in the twelve months following the sale. The legislation therefore gives freedom of movement as it allows you to take out the mortgage first and then buy the property, and vice versa, providing a large time frame of 12 months. At this juncture, however, there is a case of exclusion which concerns the hypothesis that the original contract has been terminated and a new one must be entered with an amount equal to or less than the remaining share of capital to be repaid;
3. within 12 months of purchase the buyer must allocate the property to the main residence, or first home as it is usually defined, for himself and his family, or for relatives within the third degree or related within the second degree.

Limits: maximum cap achievable

The 2008 Financial Act, number 244/2007, raised the cap on deductible interest to 4-000 euros from the previous EUR 3,615.20. The maximum amount can be obtained and therefore 760 euros, corresponding to 19% of 4,000 euros. This figure includes:

• interest expense;
• ancillary charges relating to the loaned capital loan agreement;
• revaluation quotas that depend on indexation clauses.

The entities deduct the interest related to their share. For example, the mortgage of the first home involved with a married couple allows each of them to take advantage of the deduction for the part owed, except in cases where one spouse is fully dependent on the other. In the latter case, the head of the household can deduct the entire sum. The right to deduct is not lacking in cases where the person moves residence to health care institutions or for work reasons, as long as the house is not rented.

Limits for deductibility

The law specifies that a proportion of deductible interest is required and the cost of housing is required. This means that, if the mortgage exceeds the real cost paid for the purchase of the property, the facilitation must be limited to the amount that is obtained between the cost of the property indicated in the deed, the ancillary charges and the notary expenses. Summing up we can say that the deductible interest is those resulting from the ratio between the real cost of buying the house and the capital borrowed.

To accurately calculate the part of interest to which the deduction is attributable you can use this formula: (cost of purchase of the property , related charges) x the amount of interest paid / the capital given to the mortgage.

It is therefore essential to understand what is meant by ancillary charges attributable directly to the purchase. Specifically, these are:

• notary's fee;
• register tax, mortgage tax and land tax;
• any expenses incurred in cases where the authorization of a court is required to protect;
• any costs incurred related to the purchase in the context of competition proceedings.

Among the additional charges must also be considered those related to the mortgage agreement:

• fee of the notary present at the conclusion of the loan;
• The commission owed to institutions for the conduct of banking brokerage;
• Technical and investigative costs;
• related tax charges such as registration or cancellation of a mortgage, the replacement tax on the loaned capital;
• penalties for early mortgage termination:

The costs incurred for taking out the insurance on the property requested by the bank cannot be counted as an additional charges deductible. On the other hand, you can deduct 19% of your real estate brokerage costs up to a maximum of 1000 euros.

All documents to be kept in order to obtain the deduction

To obtain the deduction, you must submit the following set of documents in your tax return:

• payment of installments for the fiscal year under consideration;
• the original of the mortgage agreement in which it is pointed out that the financing was provided for the purchase of the first house;
• the purchase agreement of the property that allows you to check both the time constraints and the real costs incurred;
• all documentation attesting to the costs incurred for ancillary charges;
• the self-certification in which the owner declares that the property has been purchased and used as a main residence according to the rules and terms of the law.