In our year-end tips cite that it can be advantageous to pay mortgage interest upfront. Rates fall in 2020, especially deduction rates. By paying and deducting (part of) the 2020 interest still in 2019, you can gain a tax advantage.
Prepay mortgage interest
We are of course talking about the loan for the owner-occupied home for tax purposes. The interest and costs of this money loan are, after netting with the owner-occupied home allowance (a percentage of the WOZ value), deductible from income from work and living (Box 1).
You may, of course, deduct the mortgage interest due for the tax year. But you may also deduct the mortgage interest paid in advance in the tax year, up to a maximum of six months' interest.
Practical problem is then that your bank has to cooperate in prepaying the interest. Unfortunately, due to the administrative burden, many banks refuse to do so. If you borrowed from your own limited company or from your parents, this problem usually does not arise.
In the event of death
At Court of Appeal of ‘s-Hertogenbosch recently came across a trick involving prepayment of mortgage interest on death. The testator in this case died on 4 January. On the date of death, the entire mortgage interest for that year was prepaid. The heirs deducted this interest in the testator's death declaration.
The importance is probably clear. After the testator's death, his home no longer qualifies as his own home for tax purposes. For the deceased, the home is no longer the main residence. Nor do the heirs live in the home. As long as the home is not sold, the loan cannot be repaid, but the interest is no longer deductible in Box 1. For the heirs, both the home and the loan belong to their income from savings and investments.
The six-month period cited above is not an issue. After all, interest is paid that relates to the year in which it is paid. However, the Court decides that the time when the interest is paid is not decisive for the question of the existence of owner-occupied home interest. Interest relating to debts that are not owner-occupied housing debt from a certain point in a year may not be deducted from that point. The debt is then of course part of the basis of income from savings and investments (box 3), but this will only have an effect on the next reference date (January 1).
In the case presented to the court, therefore, of the interest paid in advance, only the part relating to the period from 1 to 4 January is deductible.