Aitor Hervás
TAX LAW DIVISION
The recent decision of the Central Economic-Administrative Tribunal (TEAC) of 20 October 2025, Case No. 2995/2025, has brought the deduction for investment in a primary residence back into the spotlight—an issue that seemed almost settled since its elimination in 2013. The deduction was only maintained, under Transitional Provision 18 of the Personal Income Tax Act (IRPF), for those who had purchased their home and applied the deduction in tax years prior to 2013.
The matter analyzed by the TEAC in this ruling stems from the situation of a taxpayer from Santa Cruz de Tenerife who, upon selling the primary residence in June 2018, used part of the sale price to pay off the mortgage and applied the full deduction in his tax return. The Tax Agency initially only recognized as deductible the instalments paid before the sale—i.e., up to May—excluding the final repayment. The new decision specifically corrects this interpretation.
Until now, the Tax Agency had argued that paying off the mortgage with funds from the sale could not be considered an investment in the residence, because the property was being transferred and therefore was no longer being acquired.
As a consequence many taxpayers were denied a significant portion of the deduction and, in some cases, its incorrect application was even
accompanied by a penalty.
The interpretation upheld by the Tax Agency resulted in the following paradox:
Anyone with enough savings to pay off the mortgage early before selling could claim the deduction.
In contrast, anyone who depended on the sale proceeds—which is a very common situation—was excluded from applying the deduction on that amount.
This approach, inconsistent with the reality of property transactions—in which sale and mortgage cancellation often occur simultaneously—generated multiple legal disputes and case law that began to shift in favor of taxpayers. Thus, the TEAC adopts this interpretive trend and now establishes it as binding precedent, finally accepting a view more aligned with the legal and economic reality of such transactions.
According to the Tribunal’s reasoning, what matters is not where the money comes from, but what obligation is being paid. If part of the sale price is used to repay a loan that originally financed the purchase of the primary residence, that repayment is part of the deductible investment, as it constitutes early amortization of the debt associated with the purchase.
The Tribunal also adds a practical point: in a property sale, the transfer of the home and the cancellation of the mortgage typically occur as a single act, not as isolated events. The transaction is structured so that the property is transferred free of encumbrances, which requires the seller to settle the mortgage at that moment with the sale proceeds.
This interpretive criterion leaves behind years of restrictions and may, in many cases, lead to significant refunds for taxpayers applying the transitional regime for the deduction on investment in a primary residence.
The transitional rules allow a 15% deduction on amounts paid each year towards the purchase or financing of a primary residence, with an annual maximum base of €9,040—placing the maximum annual deduction at €1,356.
The TEAC’s change in criteria can significantly alter the result in the year of the sale.
To illustrate: consider a taxpayer who, during the tax year, paid €3,000 in regular mortgage instalments, and upon selling the property used €6,040 from the sale price to pay off the remaining mortgage. Before the TEAC ruling, only the €3,000 paid during the year could be counted. However, under the new criteria, the deductible base becomes the full €9,040 limit, as the final repayment is now included. Applying the 15% deduction rate, the deduction increases from €450 to €1,356, reaching the annual limit.
Taxpayers who previously sold their primary residence and did not apply the deduction on the final mortgage repayment now have the option to correct their self-assessments for tax years still open for review—currently 2021 to 2024—so long as they provide documentation proving both the sale and full repayment of the mortgage loan. Earlier periods can no longer be amended due to the four-year statute of limitations. Accordingly, it is advisable to review each case without delay and gather all necessary supporting documents in advance.
