Posted on 19 March 2024
Prorata and caps on interest charges on a principal residence
Learn about proratisation and the caps on debtor interest for a principal residence. Discover how these tax regulations can impact your finances and optimize your tax deductions.
Tax changes can often cause confusion among taxpayers.
In 2023, Luxembourg implemented new tax rules regarding income tax filing, particularly concerning the deduction of mortgage interest for main properties. It's crucial for property owners eager to optimize their tax deductions to fully understand these changes.
Limits for Tax Declaration in 2023
The deductible ceiling limits for primary residences vary depending on the year of occupancy and household composition. Here's a summary of deductible amounts per person:
- For the first 5 years: €3,000 per person
- Between the 6th and 10th years: €2,250 per person
- From the 10th year onwards: €1,500 per person.
Prorating Deductible Interest for Primary Residence
One of the most significant changes introduced in 2023 concerns the proration of deductible interest for primary residences.
Previously, interest could be deducted without a ceiling for the period when the dwelling was not occupied. However, this rule underwent a major revision, and the benefits are now less generous than before.
Differentiation based on the acquisition of a new property (VEFA) or a previously inhabited dwelling
For a new dwelling (VEFA), the previously established rules continue to apply, allowing unlimited deduction of interest payable, as well as notary fees related to the opening of credit and banking fees, between the acquisition date and the move-in date.
However, when purchasing a previously inhabited property, specific conditions apply to benefit from unlimited deduction of deductible interest.
Conditions for unlimited deduction:
To benefit from the proration of deductible interest, taxpayers must prove that they were unable to move in immediately after purchasing the property due to major renovation works in progress.
These works must result in a significant transformation of the state of the house, thus meeting basic housing needs such as heating, sanitary facilities, kitchen, and living spaces. It is therefore essential to keep all invoices, receipts, or other supporting documents to demonstrate that the renovations or works were necessary to remedy the dilapidated or outdated condition of the acquired property.
Therefore, if the taxpayer did not move in immediately after purchase due to aesthetic works or planning constraints, they will not be able to benefit from unlimited deduction of deductible interest. In this situation, the previously mentioned deduction ceilings must be considered for tax deduction.
Before 2023, unlimited deduction was automatically applied when the taxpayer moved in during the fiscal year, whether it was just after or some time after acquiring their home, regardless of the reasons.
Practical Example
Let's imagine a taxpayer buys a house in January and moves in May without carrying out significant renovations. In this case, no proration of deductible interest would be applied. However, if the same taxpayer undertakes significant renovations before moving in because the building was dilapidated, such as repairing sanitary facilities or modernizing electrical installations, the proration of deductible interest could apply.
Simplify your tax declaration with taxx.lu
On taxx.lu, you will also find a large number of simulators, including one that allows you to determine if you are eligible for unlimited deduction of mortgage interest before moving in: https://taxx.lu/simulation/renovations?locale=en
