Do not forget to claim the loan interest deduction for housing purposes

As of 1 January 2021, the maximum amount of deduction of interest paid on a mortgage loan or a loan from a building savings scheme (hereinafter "loan") used to financing of the housing needs of the taxpayer or close relatives from the tax base was reduced from the original CZK 300,000 to the current CZK 150,000. The relevant date for determining the limit of the deduction is the date of entry into the cadastre register, not the date of the conclusion of the loan agreement. The subject shall prove this date by a certificate issued by the cadastral office. However, interest can be deducted up to a maximum of zero tax base. Under certain circumstances, a taxpayer can thus save up to CZK 45,000 or CZK 22,500 per year in taxes at a tax rate of 15% (when applying the tax rate of 23%, the amounts are CZK 69,000 or CZK 34,500).

We can also add that if the housing need was acquired by 2020 at the latest, but the loan was refinanced from 2021 onwards, the maximum amount of the interest deduction claim of CZK 300,000 still applies, and furthermore, if the interest deduction is only applied for part of the year, it is not possible to exceed one-twelfth of this maximum amount for each month of interest payment, i.e. CZK 25,000 or CZK 12,500.

What is the definition of housing need?

Housing need is detailed in Section 4b of the Income Tax Act (hereinafter "ITA"). In simplified terms, the following points are applied in relation to the deduction of interest on a loan:

• construction of immovable property for the housing need,
• the purchase of a plot of land on which the construction of a housing need will be started within 4 years,
• the purchase of immovable property for the housing need,
• reconstruction of immovable property related to the housing need,
• the settlement of the joint (common) ownership of spouses in case of payment of the share of the immovable property related to the housing need.

The close relatives mentioned above are in this case the following persons: the other spouse, descendants, parents, and grandparents of both spouses.

It is also important to mention that in the case of immovable property used both for housing and for business or rental purposes, it is needed to apportion the area of the immovable property and claim the interest deduction accordingly. However, if the taxpayer would like to deduct interest on immovable property that will be used only for business or rental purposes, he is out of luck, or eventually, he can deduct these costs from the income from the relevant activity, unless he applies flat-rate costs. Moreover, interest cannot be claimed in the case of cottages or chalets.

On the other hand, we would like to inform you that a decision of the Supreme Administrative Court (hereinafter "SAC") 1 Afs 133/2019 - 34 of 25 June 2020 (only in Czech) was issued in relation to a holiday property that is occupied all year round, as a result of the tax administration not allowing the deduction of interest in relation to this type of property. The decision shows that a building for family recreation may meet the definition of a housing need under certain conditions. Previously, the tax administration had decided based on the formal indication of the property in the cadastre register, but now it is bound by the legal opinion expressed by the SAC and is obliged to consider the actual state of use. However, the taxpayer is obliged to prove that the claim to deduct interest is justified, firstly, by actually permanently residing in the property (this can be proved, for example, by paying waste collection fees, delivering mail, a municipality's confirmation of permanent residence, witnesses´ proposal, etc.) and that the building meets the technical requirements for a family house (construction and technical documentation, photo documentation, etc.), since the property cannot be registered as a family house in the cadastre register, e.g. due to the location where the construction of family houses is prohibited.

What documents do you need to provide?

The claim to the deduction must be documented to the tax authority in the first year in which the interest deduction is claimed in the annual tax settlement or tax return, either by the loan agreement or by an extract from the cadastre register.  Information on the amount of interest paid must be provided each year in which the interest deduction is claimed. Proving the housing need is certainly easier if you have a permanent residence in the property, but the law does not require this condition and it is therefore up to you to decide how else you will be able to prove to the tax authority that you meet the housing need condition.

Who is entitled to claim the interest deduction?

Only the person stated in the loan agreement is always entitled to deduct the interest. If more than one person is stated in the contract, only one of them can claim the full interest deduction, or all people equally. If only one of the participants uses the claim, it is advisable to provide the tax authority with information on the non-application by another person, e.g. in the form of an affidavit.

In the following part of articles on the topic of immovable properties and their tax implications, we will focus on the exemption of income from the sale of immovable property.