Under certain conditions, loan interest can be deducted for tax purposes. Once you use the borrowed money to secure your own income, you can credit your borrowing costs. Such expenses are part of the business expenses that reduce your tax burden. Basically, this applies just for loans around the topic of employment, training or real estate. Even with the financing of a maintenance can be realized on the credit costs tax advantages. Not infrequently, such benefits are overlooked in the tax return. Both as an employee and as a self-employed, you can benefit from the regulations. What you should know if you want to deduct your borrowing costs is explained in this article.
The Treasury separates repayment and interest
Currently there are loans at relatively low interest rates. This is due to the persistent low of the key interest rate and leads to a strong demand for loans on a permanent basis. In 2017, a new record was reached in Germany with over 8 million approved loans to private individuals and households. Loans are characterized by certain characteristics. The borrowed amount is usually repaid by the borrower through constant monthly installments. In addition, there are lending rates charged by a lender for his service. Banks or other banks earn money through interest costs. Basically, interest rates are nothing more than deployment fees for the loan amount.
Typically, the monthly repayment installments include both the repayment and interest rates. Even before signing the loan agreement, the borrower knows about the calculated interest rate. In addition, the amount of the monthly installments and the duration of the term are fixed. Under certain conditions, interest may be charged to the Treasury as special expenses or expenses. Interest rates are therefore deemed to be procurement costs that are considered to be the receipt or improvement of revenue of the taxpayer. This effect must not only be temporary, but must be noticeably permanent. The repayment is generally excluded from this rule, since the loan amount is not taxed on the payment.
Advertising costs reduce the tax burden Taxpayers are allowed to deduct income from their income. This reduces the amount of revenue tax is payable on. In principle, advertising costs ensure the acquisition, preservation and securing of own income.
Credit costs for real estate can be deducted
In order to finance the financing of an apartment or a house, a loan is often due. In this case, advertising costs can be claimed from the tax office. When it comes to the interest cost of a real estate loan, tax benefits are there for you if the property brings you rental income. You also benefit when you take out a loan for modernization. In the event that you live as a landlord yourself in the house, the scheme is proportionate. You can not claim your purely privately used living space.
So you benefit as a landlord
If you are either a landlord or you want to sell the property, you can deduct the cost of the loan. In both cases, interest costs may be entered in the tax return as income-related expenses in the heading “rental income”. Tax relief is always an option if you borrow money for a property in order to acquire it or to guarantee its existence. The latter includes credit-financed renovation or modernization. These include, for example, loans that allow repair of the roof or provide money for the renovation of the heating system. Any interest charges incurred on such loans are taken into account by the Treasury in your favor. They serve to preserve the value of the property and thus directly secure your future rental income.
Even with a loan that you can use to build land, you can reduce your tax burden. The approach does not differ from the model of real estate financing as landlord. In order to claim your credit costs, a building permit is required. If this is not yet available and you purchase farm maintenance land, this will not be significant. Of importance in the end is only that on the vacant lot by your loan rental space is created. The construction intent can be demonstrated to the tax office by means of an issued or pending planning permission.
If you live as a landlord in the house
In principle, you can only claim professional expenses for buildings or apartments that you actually rent. For exclusively self-occupied living space, no interest costs of a real estate loan can be deducted from the tax. What applies if you live in the same house as a landlord? If your property has such a mixed use, you can claim at least a partial amount of the interest charge. The cost of ownership is the proportion of the cost of credit attributable to the rented portion of your property. As a simple example, a semi-detached house can apply. You inhabit one half while you rent the other. Both halves of the house are identical in size and surface. If you finance the renovation of the entire façade through a loan, the costs will be 50:50.
In our double house example, the calculation succeeds uncomplicated in equal parts. On the other hand, if you rent a flat for example, or just two rooms in the attic, the calculation of the proportionate interest costs will be a bit more complicated. It is advantageous in cases of mixed use, if you split credit or loan exactly where possible. Ideally, you should set up two separate accounts for such loan investments for clear allocation. Finally, you can transfer the sums proportionally to these. The part you need to finance or renovate the self-occupied living space on the one account. The remainder for the leased area to the other account. They make it easier for the authorities to work and avoid ambiguity. In addition, you should take care that your repayment installments are listed separately from the interest amounts in your loan agreement.
Further advantages of rented living space
As long as your loan is used for a rented property, there are further opportunities for tax relief. For example, in the refinancing of your existing construction loan. If you repay a current credit, which serves the purchase or the repair of your real estate, a compensation can be computed for it. So-called prepayment penalties are part of your advertising costs. You are due for a rescheduling with some lenders should you prematurely replace a financing with another loan. However, the tax advantage does not apply if you pay off a loan prematurely, only to sell your previously rented property without encumbrances.
The discount is in a sense a down payment on future interest. The total rate of your loan is a bit discounted with a discount, as this reduces the interest burden. You can also claim this special payment from the tax office. Such an interest prepayment will then be offset directly against your other income. This can give you the benefit of greater relief, which occurs at once instead of running for years. However, this applies that your disagio is calculated proportionately and does not exceed the usual conditions of the market.
Borrowing costs reduce your tax burden As real estate tax credits can only be claimed for rental, this directly affects your income. Let’s assume that you receive € 6,000 in rent payments per year. The interest cost of a loan to finance the property, its modernization or maintenance costs you 1,000 euros. Then you will be charged by the tax authority only 5,000 euros as a total revenue and taxed.
Write off professional credit costs
If you are dependent on a loan for the procurement of work materials, this can also result in a tax saving effect. You benefit from this regulation through a whole series of loans. Borrowing costs that you incur for further training are usually part of the cost of income. Likewise, you can, for example, claim a second home or a car and reduce your taxable profit if such purchases are for professional reasons.
This applies to the company-owned living space
In the case of own-use use of your property, loan or loan interest can be deducted for tax purposes. As in the case of letting, the condition that the loan is used for modernization or the entire financing of the property also applies here. In addition, the part of the property used as so-called commercial property must be able to be precisely assigned. The benefits do not apply to those parts of their home that are used for private purposes only. Own use includes the room (s) that you use as a study. Only for these rooms you can count on tax advantages. For example, if all the windows in your home are redeveloped using a loan, you’ll have to calculate the cost proportionately. For example, if you lose 20 square meters of living space of 100 square meters on your work area, one-fifth of such additional costs are tax-deductible.
Above all, self-employed persons who depend on their own office at home for their trade profit from this tax advantage. If you work in your own home, you can also deduct the borrowing costs for home furnishings. These purchases must serve your professional activity. Desk furniture, computers or filing cabinets come as examples of an operational investment in question. If you finance such commodities yourself for your day-to-day work, the lending rates fall below the cost of income and reduce your taxable income to the Treasury.
Tax benefits by car or second home
If your workplace is so far away from your place of residence that you have to buy a flat for yourself, the interest on the financing is deductible. In addition, you can claim interest costs if, in the event of difficulties, you have to claim a loan for legal or attorney’s fees. Also possible borrowing costs that you incur in such a property purchase for a removal company, are considered as advertising costs. The same applies if you finance renovation or modernization costs for a work-related second home or pay for the broker through a loan. If you rent an apartment for professional reasons instead of buying, similar conditions apply. Your total rental and incidental costs will be deducted from the tax burden by the tax office. It is assumed that you can not guarantee your permanent income in the form of wages and salary without the second home.
If you need a loan to finance a car, the interest costs can sometimes also be deducted. This is often the case for self-employed persons who are traveling in the field, for example, and therefore need their own car. As a rule, this also applies to craftsmen who rely on a van for their trade. Credit costs can then be claimed as operating expenses without restrictions. Excluded from such tax benefits are only when you need a car to get to your workplace. In that case, your car is considered a private purchase, as it is not used exclusively for business purposes.
Write off borrowing costs for education
If you incur loan interest for the financing of continuing education and training, these can also be deducted. Depending on the type of loan, it depends on whether the cost of the loan is considered to be a cost of income or special expenses. An educational measure contributes to the bottom line that you generate income in the long run and keep it safe. In the case of an interest-free BaföG loan, this option does not apply, while, for example, you can claim the repayment interest from Financial credit aid. In that case you have to take into account that this support is at least partly considered as income. Inquire in advance of the training for the exact regulations. If you need a loan for your professional development, the additional costs can usually be claimed in your tax return. Also excluded here are further education courses, which are more likely to benefit your private interests than your professional career
Private credit costs are not deductible
Loans that are not related to securing your permanent income are excluded from depreciation. Affected by this are all loans that finance services or goods for purely private purposes. This may, for example, concern the loan for your new kitchen or wedding party as well as the credit for a holiday or private car. The respective credit costs can not be written off in any way vis-à-vis the tax office. With such a private installment loan, costs can still be saved in a comfortable way. You should generally look for the cheapest provider and benefit in addition to the low cost of special conditions. The latest loan offers with the best conditions can be found without obligation in our free loan comparison.
Find out before applying for a loan In order to claim credit costs for tax purposes, the loan must demonstrably use your permanent income such as wages or rent. This means that a proper calculation of the loan rate must be present. Likewise, its assignment to the purpose should be clearly identifiable. In the case of uncertainties, it is advisable always to consult a tax adviser before making a loan application. He can also show you further possibilities in all cases.
Lending is a long-term burden in most cases. So much the better that you can at least assert the cost of credit before Father State. Such special expenses or expenses can ultimately reduce your tax burden. The prerequisite is that the borrowed money contributes to securing your income in the long run. It can be about salary or the financing of a professional development. The tax advantage also applies to rented or partially used residential properties. If you need a loan to acquire them, the same applies as for expensive maintenance or modernization measures. The interest should be listed separately, so that they can be counted towards your total income. If in doubt, you should consult your tax adviser before submitting a loan application for the exact terms. Such borrowing costs will ultimately reduce your tax burden. Use the existing guidelines and get advice if necessary to get the most out of your benefits. After all, nobody has money to give to the tax office.