If the idea of having to make the tax return makes you shudder, perhaps, to think that the interest payable on the loan or the loan can be deducted could make a slight smile tickle on your face.
Surely, many readers were aware of this practice, but in this article, you want to provide all the information in this regard, so as to provide a detailed guide that allows you to focus on the documentation to be kept, on the timing and on the main differences between the various types of loans and mortgages.
What are passive interest?
Interest expense on the loan represents a cost item that is borne by the debtor; on the contrary, for the creditor, they represent a form of remuneration.
In a loan, the interest is paid to the lender by payment of the installments, depending on the terms set in the amortization plan. These interests are made up of the sum of a share of capital and a share representing just the interest expense. Based on the amortization plan and the type of interest chosen, the interest rate may have a more or less considerable weight on the total repayment.
It goes without saying that the amount of interest payable depends on certain factors, or the following:
- by the amount of capital required;
- the duration of the chosen repayment period ;
- from the interest rate applied;
- from the sum of a base rate and the spread that represents the margin of profit of the bank.
What are the possible tax deductions for those who have submitted a loan?
Going specifically, those who have taken out a mortgage can take advantage of the 19% tax breaks on interest paid; you can deduct, from your own income from employment or from pensioner, the expenses regarding the interest payable for mortgage loans that are intended for the purchase of the main house. Furthermore, the deduction is for the following items:
- interest expense;
- ancillary charges;
- the revaluation quotas that depend on indexing clauses relating to mortgage loans contracted for the purchase of buildings considered as a principal residence.
The deduction (or deductibility see below) refers to a maximum amount of $ 4,000.00, specifically:
- for the purchase of other properties up to $ 2,065.83;
- for mortgages contracted in 1997 for building restoration up to $ 2,582.28;
- for mortgages for main house construction up to $ 2,582.28.
Interest can also be deducted for agricultural loans or mortgages.
Finally: What are the rules to be respected?
As already mentioned, it is possible to deduct passive interests for a maximum amount of $ 4,000.00; from this sum then 19% will be calculated.
The interest payable is intended for each loan holder for the loans contracted before 1993. While for mortgages stipulated after 1993, it is necessary to divide the deductible amount between the various holders of the contract.
The property must be used as a principal residence within twelve months from the time of purchase, which must take place in the year preceding or following the date of stipulation of the loan.
What are the documents that must be kept for the pupose of the Tax deductions?
The documents that need for tax deduction, therefore for the tax return, are also useful for a possible verification by the financial administration.
The interested party must take care to keep the following documentation:
- receipts relating to the payment of interest incurred in the reference year;
- a copy of the mortgage loan agreement which shows that the loan was specifically granted for the purchase of a property to be used as a principal residence, otherwise, or if the loan contract did not provide a purpose, it is necessary to specify the motivation for which the financing was requested;
- the contract for the purchase of the property necessary to verify the time and regulatory constraints;
- self-certification attesting that the property being purchased has been used as a principal residence according to the law.
Not always the interests on loans can be deducted
Stating that interest on loans can be deducted from taxes is half the truth, as this depends heavily on the type of loan.
Personal loans are intended for private needs and therefore for the tax authorities they are not entitled to any deductions.
The only case in which it is possible to take advantage of deductions on interest payable is represented by the financing contracts stipulated by the work activities, ie the companies.
A private individual will never have the right to reimbursement of a portion of the share (interest expense) paid and included in the repayment of personal loans.
A different reality is represented by freelancers and self-employed workers, therefore also individual firms. In this case, the loan will be requested and finalized for the professional activity.
In the event that a substantial amount is to be used, which will only partially cover professional expenses, the advice is to divide the loan into two parts: a sum destined for personal and non-working needs and a part that regards the actual work requirements; only this second part will be subject to tax deductions.
It has been said that the deductions can also concern loans and agricultural mortgages : in this case, the paid interest paid can be deducted for a sum equal to or less than the sum of the agricultural income and the household income that are declared.
In the event that it is present, to this amount must be added that the share of domestic and agricultural income, equal to the share of participation in companies of persons engaged in agricultural activity.
We make clarity on the differences between deductions for companies and private persons.
In this article, the substantial difference between the possibility of companies being able to benefit from interest deductions and the impossibility of private individuals to proceed with such facilities has already been clarified.
In fact, in the case in which the deduction of interest on the loan was made by the companies, it is possible to deduct the interests from the revenues calculated for the definition of the business income, while for private citizens it is foreseen the deductibility from the IRPEF, but only to determined conditions, or the following:
the 19% deduction can also be made by private individuals only if the loan has been activated to buy, build or renovate a home destined or to be used as a first home.