Abolishment of tax credit deduction from January 2011 on purchases of principal residences where income exceeds 24.000 Euros

As of January 1, 2011, if the Sustainable Economy Act bill does not change, tax deductions for primary residences will be amended. They will only be tax deductible for taxpayers with incomes below 24,107.2 Euros. The deductible tax base of 9,015 only applies to incomes below 17,700.2 Euros, and from this amount, a gradual linear reduction will apply until the 24,107.2 mentioned above is reached. Therefore you only have until December 31, 2010 to purchase your primary residence and thus ensure tax deductions regardless of your income.

Unless there are last-minute changes which are not expected, the proposed Law on State Budget of 2011 will abolish the tax deduction for the purchase of housing for incomes exceeding 24,107 Euros. This abolition has no retroactive effect, so it only affects those who purchase a primary residence from the 1st of January 2011 onwards.

Persons who exceed this income and are thinking in purchasing a property have just over two months to buy and benefit from the tax deduction.

Independent of the abolition of the tax reduction for incomes exceeding 24,107 Euros, there are also changes that affect people whose income is situated between 17,707 and 24,107 Euros, they will have a lower deduction to the one before the change and a gradual linear reduction will be applied. For those with an income of less than 17,707.20 Euros the current status remains in force.

Beware if you have a bank housing account

In relation to housing accounts, people who have an account of this type, and whose income exceeds the limit of 24,107 Euros should liquidate and purchase before the year’s end. If you do not do so not only will you lose future deductions, but must also repay tax credits taken in previous years.

This last point is a delicate and controversial subject as there are positions that support the possibility that these taxpayers may be in an uncertain legal situation, as they opened their housing account under conditions which the Government has now voted to change.

Buy now or wait?

The main question for those interested in purchasing a primary residence could be looked at from the point of view that the potential loss from the tax deduction could be recuperated through the reduction of selling prices. There may be doubt among taxpayers wether to buy more expensive now and benefit from the tax relief or to wait and possibly buy for a lower price meaning the loss of the tax credit deduction.

Although time is running out, numbers are needed before making the right decision. It is estimated that the loss of tax credit deduction could on average have an economic impact of about 30,000 Euros for each affected taxpayer (for mortgages of 25 years).

Taking this figure as a reference, we must evaluate if the fall in prices can achieve these margins to decide to wait to buy as the best option, always and when you fall into that tax relief group.

Tax savings

If you purchase after 2011, forget about tax strategies. There will be no strategy for tax savings on primary residences. The only way is to amortize mortgage repayments to save on interests provided you have money saved. From 2011 it will be purely a financial decision, not fiscal. In short once you have removed the deduction for certain income levels the only benefits to be made when purchasing a primary residence is to manage the property market to benefit from good deals and negotiate good conditions on mortgage loans.

For us as real estate experts, it is clear that those who need to buy a house will look for a good deal and will not be put off by the reduction as it is only a small aid: 1,350 Euros for those who are at the limit of the annual loan of 9,015 Euros. That is, more or less, 112.5 Euros per month. With low interest rates, this reduction may not be noticed much or the buyers could be compensated by the cheaper prices of properties.

Await further price reductions?

You may well be waiting for the prices to lower. If so, you should calculate how much you save in price compared to the money saved each year in tax deductions. If you have already decided on the property you wish to buy and have available the funds, the best decision looking from the tax point of view is to buy before December 31st so that you can begin to pay less for your mortgage and have more liquidity.