(2023)
Property sales: Are subsequent debt interest payments deductible?
When selling a rented property, the proceeds are generally used to pay off the remaining loan. However, it may happen that the proceeds are not sufficient to pay off the debt, and the loan must continue to be repaid. This phenomenon is often observed in investment models with worthless properties and investment objects in the new federal states. The following two cases must be distinguished:
(1) Interest on debt for externally financed acquisition/production costs
If the acquisition or production costs of the rental property were financed by a loan and the proceeds are not sufficient to pay it off, the ongoing interest on debt can be deducted as subsequent income-related expenses for income from renting and leasing. This is because the connection between the remaining loan and the previous rental income continues after the sale if the proceeds are not sufficient to repay the loan (BFH ruling of 20.6.2012, IX R 67/10).
It does not matter whether the property is sold within 10 years of its acquisition, making it a taxable transaction, or whether the sale takes place after the ten-year period and remains tax-free (BFH ruling of 8.4.2014, IX R 45/13).
(2) Interest on debt for externally financed maintenance expenses
If extensive renovation work was financed by a loan, this constitutes maintenance expenses and was deductible as income-related expenses during the rental period, e.g. flat modernisation, replacement of the heating system, roof renewal.
- If the rental property was sold before 2014, the interest on debt could - and can still - be deducted as subsequent income-related expenses after the end of the rental period or after the sale of the house. How the proceeds were used did not matter (BFH ruling of 12.10.2005, IX R 28/04).
- If the rental property was sold after 1.1.2014, a stricter regulation applies: Now, interest on debt for loan-financed maintenance expenses after the sale of the rental property is only recognised as subsequent income-related expenses from renting and leasing if the proceeds are not sufficient to pay off the loan (BMF letter of 15.1.2014, BStBl. 2014 I p. 108).
