Changes in the deductibility of loan interest from the personal income tax base as of 1 January 2021
As of 1 January 2021, several major changes have been made to the Income Taxes Act regarding the deductibility of interest on loans from building savings, mortgages granted by banks and loans granted by building societies to finance housing needs, to repay a loan or borrowings used to finance housing needs from the personal income tax base.
A major change is the reduction of the amount of interest that the taxpayer can deduct from the personal income tax base. As of 1 January 2021, the amount of interest on loans that can be deducted has changed from CZK 300,000 to CZK 150,000 for a jointly managed household.
To assess whether or not this change applies to you, it is necessary to look at the point in time when the housing need financed by a loan was satisfied. If the housing need was satisfied from 1 January 2021, you will be able to claim interest on the loan up to a maximum of CZK 150,000. If the housing need financed by a loan was satisfied before 31 December 2020, the law valid until that date applies in line with transitional provisions and you can continue to claim interest up to an aggregate amount of CZK 300,000 per year for one jointly managed household. The decisive moment of the satisfaction of a housing need in the case of satisfaction for valuable consideration is the date on which the ownership title was entered in the Land Register, i.e. the date on which the petition for entry in the Land Register was filed.
Furthermore, the Income Taxes Act has been amended with respect to the acquisition of land and the deadline by which the taxpayer must commence construction of an apartment house, family house, a unit that does not include non-residential space other than a garage, cellar or storage room on the land. The 4-year time limit for commencing construction has not changed, but the point in time from which the 4-year time limit is calculated has changed. In the legislation valid until 31 December 2020, this was the date of conclusion of the loan agreement. As of 1 January 2021, it is the moment of acquisition of the land (i.e. the date of when the petition for entry in the Land Registry was filed), thus slightly extending the time limit for starting construction on the land.
As already mentioned, an important point for assessing whether you should follow the new or the old rules is the moment of satisfaction of a housing need. For example, if you decided to take out a new loan in 2021 to refinance a previous home loan taken out until 31 December 2020, you would use the old rules to assess the deductibility of loan interest and you would thus still be able to claim up to CZK 300,000 of interest per year.
Changes to the deduction of loan interest from 1 January 2021 may already be reflected in the amount of deductible interest when personal income tax returns and annual reconciliations for 2021 are prepared. The taxpayer may not be able to claim all the interest paid on satisfaction of a housing need as a deductible item if the interest paid on loans exceeds the limit of CZK 150,000 in a jointly managed household.
The Ministry of Finance of the Czech Republic and the General Financial Directorate have commented on certain problematic situations concerning the determination of the decisive moment for the application of the old or new amount of loan interest within the framework of Coordination Committee No. 570/27.01.21 of 24 March 2021. The minutes of the meeting of this Coordination Committee may provide guidance to taxpayers and payroll accountants on how to resolve certain debatable issues concerning the changes in the deductibility of loan interest from 1 January 2021.