The sudden shift in monetary policy by the European Central Bank (ECB) during the last inflation crisis not only made variable and blended mortgages more expensive, but also reinstated old tax credits in Spain that had steadily declined over the years. Rising interest rates, spurred by Frankfurt’s offensive to stem price increases, led to the highest increase in fiscal costs associated with the deduction for the purchase of a primary residence in 2023 in more than 15 years. The benefit was abolished by the government in 2013 and has remained on a transitional scheme ever since.
Official data collected by the Internal Revenue Service clearly reflects changing trends. After reaching a minimum amount in 2022 with a collection cost of 1.843 billion euros for the Treasury, the total amount of deductions increased by 23% to 2.268 billion euros in 2023. This is an unexpected increase in a historical series that has only seen a downward trend since 2008.
Income tax deductions for investments in principal residences have long been one of the most popular tax benefits in Spain. This allowed taxpayers to deduct 15% of the amount paid each year for the purchase or financing of a principal residence, up to a maximum of €9,040 per year, from their personal income tax rate. This deduction was abolished in 2013 as part of Mariano Rajoy’s government’s adjustment plan, but the lawmaker maintained a transitional system for people who acquired habitual residence before that date.
With the elimination of the benefits of new purchases, its impact was gradually and continuously reduced. The cost to the Treasury increased gradually from 6.138 billion in 2008 to 3.438 billion in 2013, 2.17 billion in 2019, and 1.843 billion in 2022. This trajectory was logical. With the door closed to new beneficiaries, the number of taxpayers entitled to the deduction diluted over the years as they repaid their loans. Additionally, Euribor’s low interest rates and stability include the amount of interest paid and the resulting deductions that apply.
That trend will completely break down in 2023. Euribor has risen significantly since the start of the year, ending the year at around 4%, making new loans much more expensive, as well as variable and blended mortgages that were already taken out several years ago. The average installment of these credits became more expensive, and this increase automatically increased the personal income tax deduction for taxpayers who still qualified for this benefit.
As José García Montalvo, professor of economics at Barcelona’s Pompeu Fabra University, explained, the more than 2.2 billion euros that the Ministry of Finance stopped collecting in 2023 due to deductions is very similar to the amount recorded five years ago. However, although Euribo was negative at that time, it could exceed 4% in 2023.
The effect of this higher interest rate would have largely offset the natural decline in forbearance mortgage balances, Montalvo continued, but would decline each year if the loan reached a temporary threshold or was paid off early. In addition, higher interest rates may have increased early terminations and, to a lesser extent, affected mortgages that are still tax deductible depending on the remaining term of the loan.
The deduction mechanism remains the same as before the suppression. Those who signed a mortgage before 1 January 2013 can deduct 15% of their annual payments (principal, interest and associated insurance) up to a maximum of €9,040 per year. The Treasury will refund up to 1,356 euros per taxpayer, but double that amount if two loan holders file separate returns.
Despite the fallout from this fiscal impact, the number of beneficiaries continues to decline and is now less than half the number at the end of the real estate bubble, when about 7 million filers applied for the deduction.
In recent months, the Central Economic and Administrative Court (TEAC), which relies on the Ministry of Finance, has adopted a more flexible interpretation of deductions, modifying criteria that had previously been limited to some extent by the Internal Revenue Service. In one of the most relevant changes, the court last April allowed taxpayers who acquired a home before January 1, 2013 to apply the deduction to their next year’s payment, even if they did not claim it the previous year, unless they were required to file an income tax return due to insufficient income.
TEAC recently revealed that canceling a mortgage with proceeds from the sale of a property can be considered a deductible investment, increasing the potential for returns. Until now, the Ministry of Finance had limited the deduction to only fees paid up to the day before the move.
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