Are the interest on a loan taken out for the purchase of real estate tax deductible costs?
In order to run a business, taxpayers need a suitable seat - a flat or a larger flat, e.g. an entire building. Usually, the purchase of these premises and buildings is financed with funds obtained thanks to credits and loans. While capital installments are not recognized as costs in the KPiR, interest on a loan taken out for the purchase of real estate may be included in them. However, certain conditions must be met.
Pursuant to Art. 22 sec. 1 of the Personal Income Tax Act, deductible costs are the costs incurred in order to achieve or maintain or secure the source of income, with the exception of the costs listed in art. 23 (i.e., e.g. expenditure on the acquisition of land, fines and penalties adjudicated in fiscal criminal proceedings, income tax).
Based on this provision, it can be assumed that tax deductible costs are all appropriately justified expenses related to the achievement of revenues. For each expenditure, a cause and effect relationship related to the revenue should be established separately, the burden of which is borne individually by each taxpayer. How is it with interest on loans?
Interest on loans
Art. 23 sec. 1 point 8a of the PIT Act states that expenses for repayment of loans (credits) are not considered tax deductible costs, except for capitalized interest on these loans (credits). Point 32 of the same article also excludes from tax deductible costs accrued but unpaid or redeemed interest on liabilities, including loans (credits).
Pursuant to Art. 22 and 23, it is considered that the inclusion of interest on a loan as tax costs depends on the existence of a cause and effect relationship between the loan taken for the purchase of real estate and the income obtained from business activity, as well as the payment of such interest. The cause and effect relationship of the loan with the income achieved means that the real estate for which the loan was taken must be used for the purpose of conducting business activity and the entrepreneur should generate income thanks to it.
However, it should be remembered that when classifying interest as a tax cost, account should be taken of Art. 23 section 1 point 33 of the PIT Act. According to this provision, the tax deductible costs do not include interest, commissions and exchange rate differences on loans (credits) that increase the investment costs during the period of these investments. This means that if the property is under construction (reconstruction or adaptation), and the entrepreneur pays off the loan with the interest due during the implementation of the investment, this interest does not constitute a tax deductible cost. This interest increases the value of the property until its construction is completed.
In summary, in order for interest on a loan for the purchase of real estate to be recognized in the current period as tax costs, the following conditions must be met:
- the loan taken is in a cause-and-effect relationship with the income obtained by the taxpayer from the conducted business activity,
- interest has been paid,
- the interest does not increase the investment cost.
The booking is made in col. 13 of the Tax Book of Income and Expenditure - other expenses.
Interest on a private loan
If the entrepreneur uses part of his private apartment for business purposes and has taken out a private loan for its purchase, interest on this account can also be counted as costs. The condition is to determine the appropriate part of the interest that relates to the business. The amount of interest to be included in the costs is calculated in proportion to the area of the flat used for business purposes to the total area of the flat. In this case, in order to include the interest as tax deductible costs, you should remember about the proper documentation regarding the division of the apartment for private and business purposes, loan documentation and the actual payment of interest. In addition, when an entrepreneur takes out a private loan, which is used entirely for business purposes (e.g. purchase of machines, computers), then also interest may constitute a tax deductible cost. In this situation, it will only be necessary to properly document the purpose of the loan and the interest can be considered as tax costs.