Deducting Mortgage Interest After Selling a Rental 2026
The flat is sold, the sale price did not cover the loan — and the bank keeps debiting interest. The obvious assumption is that without rental income there are no deductible expenses. It is wrong. Germany's Federal Fiscal Court (Bundesfinanzhof, BFH) allows this interest to remain deductible in principle, but ties it to a condition that many sellers unknowingly breach, destroying the deduction themselves. What matters is not that you sold, but what happened to the sale price.
The link is created by use, not by assignment
Under § 9 (1) sentence 1 of the Income Tax Act (Einkommensteuergesetz, EStG), deductible expenses (Werbungskosten) are expenses incurred to acquire, secure and maintain income. This includes interest on debt, „soweit diese mit einer Einkunftsart […] im wirtschaftlichen Zusammenhang stehen" — in so far as it has an economic connection with a category of income (§ 9 (1) sentence 3 no. 1 sentence 1 EStG). For a let property that category is income from letting under § 21 (1) sentence 1 no. 1 EStG.
How that connection comes about is something the BFH states strictly: it is the first, property-specific use of the loan funds to acquire the let property that dedicates the debt to that purpose. A „bloße gedankliche Zuweisung eines Darlehens" — a mere mental assignment of a loan by the taxpayer — is not enough; the funds must genuinely be attributable to a specific asset. So an owner holding several properties and several loans cannot re-sort them after the fact into whatever arrangement is most tax-efficient.
The sale does not end the link — it moves it
The key sentence appears in the reasoning of judgment IX R 4/17: an established economic connection does not lapse „nicht allein deshalb, weil die mit den Darlehensmitteln angeschaffte Immobilie veräußert wird" — not merely because the property bought with the loan is sold. Instead it continues in the sale price; the BFH calls this the Surrogationsbetrachtung, a substitution analysis. And expressly so regardless of whether the sale was taxable at all: whether you sold inside the ten-year period of § 23 (1) sentence 1 no. 1 EStG or long afterwards makes no difference here. Whether your sale is taxable is covered in our article on capital gains tax on a property sale; for the interest deduction it is the wrong question.
The right question is: what happened to the money?
The court's test in three steps
The reasoning in IX R 4/17 can be read as a decision tree. Work through it in this order:
| What happened to the sale proceeds | Consequence for the interest |
|---|---|
| 1. You used them to acquire a new source of income, for example another rental property | The connection continues in the new property — pro rata, in the amount of the proceeds actually used. |
| 2. No new property, and the proceeds would have been enough to repay the loan | The economic connection ends — regardless of whether you actually repay the loan or spend the proceeds privately. No deduction. |
| 3. No new property, and the proceeds were not enough | The portion of the original acquisition loan that could not be repaid stays connected to the letting. Interest on it remains deductible. |
Case 2 is where it gets expensive, and it is routinely underestimated. The BFH is unambiguous: if the seller chooses to leave the loan in place and use the sale price for something else, the connection that would otherwise persist is „von einer privat motivierten Entscheidung […] ersetzt" — replaced by a privately motivated decision. For tax purposes you are then treated as if you had repaid, only without the benefit of having done so.
Priority of debt repayment: the proceeds belong to the bank
Hence the rule the BFH calls the Grundsatz des Vorrangs der Schuldentilgung, the principle that repaying the debt takes priority. The taxpayer must use the sale proceeds „stets und in vollem Umfang" — always and in full — to redeem the loan, unless genuine obstacles to repayment stand in the way. Only the remainder after that still carries deductible interest.
What does not count as such an obstacle was also decided in IX R 4/17: a fixed-rate loan with an agreed term does not. The borrower's need to realise the mortgaged property obliges the bank to consent to early redemption against an appropriate early repayment penalty (Vorfälligkeitsentschädigung), and the BFH cites the case law of the Federal Court of Justice (Bundesgerichtshof, BGH) for this. A running fixed-interest period is therefore no excuse; it merely has a price, and that price follows tax rules of its own, covered in our article on the early repayment penalty.
Worked example: how much interest survives
A let flat, bought in 2012 for €320,000 and financed with a €290,000 loan. It is sold in 2026, when the outstanding balance is €240,000. No replacement property is bought. The follow-on loan for the portion not repaid costs 4.0% interest.
| Variant | Sale proceeds | Could not be repaid | Deductible interest p.a. |
|---|---|---|---|
| A — proceeds cover the debt | €300,000 | €0 | €0 |
| B — proceeds fall short, all of them repaid | €180,000 | €60,000 | €2,400 |
| C — as B, but €30,000 kept privately | €180,000 | €60,000 (actually outstanding: €90,000) | €2,400 |
Variant A is case 2 from the table above: proceeds of €300,000 would have fully redeemed the €240,000 balance. That the seller instead puts the money in a securities account and lets the loan run changes nothing — the deduction is gone entirely.
In variant B, €240,000 − €180,000 = €60,000 remains, which the proceeds could not cover. €60,000 × 4.0% = €2,400 of interest per year remains deductible.
Variant C is variant B with a mistake: of the €180,000, only €150,000 goes into repayment and €30,000 is spent privately. The follow-on loan therefore actually stands at €90,000 and costs €90,000 × 4.0% = €3,600 in interest. Only the €2,400 from variant B remains deductible, because the priority of debt repayment requires the proceeds to be used in full. €1,200 of interest a year is lost for tax purposes — at a 42% marginal rate, roughly €504 of tax relief, every year, until the loan is repaid.
Refinancing after the sale: two limits
The follow-on loan need not be the original one. Interest on a refinancing or restructuring loan can also be caused by the former income-earning activity. But the BFH draws two lines: the connection survives only „soweit die Valuta des Umschuldungsdarlehens nicht über den abzulösenden Restdarlehensbetrag hinausgeht und die Umschuldung sich im Rahmen einer marktüblichen Finanzierung bewegt" — in so far as the principal of the replacement loan does not exceed the balance being redeemed, and the refinancing stays within the bounds of market-standard financing.
In practice: anyone who takes the opportunity to make the follow-on loan "a little bigger" loses the deduction for the excess. And a loan on conspicuous terms — within the family, say — will be measured against what the market offers.
If you sell only part of it
With an apartment building where one unit is sold and the rest stays let, the question shifts: which loan belongs to the let part in the first place? Here the BFH demands more than a calculation after the event. The costs of the part later let and of the part later sold must be determined separately and shown accordingly, and the owner must actually pay the expenses attributable to the let part out of the loan funds.
That is a documentation requirement which can only be met in advance: separate invoicing, separate payment routes, a stated purpose in the loan agreement. Fail to do so and you do not lose the whole deduction, but you lose the apportionment — and with it, as a rule, the argument with the tax office. On apportionment in mixed-use cases, see our article on interest on mixed-use properties.
What goes in the tax return
Post-sale interest is declared as a deductible expense against income from letting — even in years when that property generates no rent at all. The result is an excess of expenses, which is offset against other income. Where the interest goes on the Anlage V form, and how the rest of it is completed, is covered in our article on completing the Anlage V.
Keep two documents for this, and keep them permanently: the notary's completion statement, showing the amount that actually reached you, and the bank's redemption confirmation for the amount out of it that went into repaying the loan. Together they evidence precisely what the priority of debt repayment turns on — and they will be asked for years later, when nobody remembers the figures.
What the courts have decided
None of this is in the statute — § 9 EStG requires only an "economic connection". What that means after a sale has been developed by the Ninth Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH) across a line of decisions. All three below are officially published and therefore to be applied generally by the tax authorities.
BFH, judgment of 16 September 2015 – IX R 40/14
The leading decision in sellers' favour: interest remains deductible even after a non-taxable sale „wenn und soweit die Verbindlichkeiten durch den Veräußerungserlös nicht getilgt werden können" — if and in so far as the liabilities cannot be repaid out of the proceeds — and that holds for a refinancing loan too. The same judgment supplies the counterweight: the proceeds must be used „stets und in vollem Umfang" to redeem the debt. Proceeds here include a life insurance payout where the policy formed part of the financing — though the owner is not obliged to surrender it early if it continues to secure the remaining loan. For you this means the deduction turns on an arithmetic operation, not on a declaration of intent.
BFH, judgment of 6 December 2017 – IX R 4/17
The limit: what is decisive is „was mit dem Erlös aus der Veräußerung des mit einem Darlehen fremdfinanzierten Vermietungsobjekts geschieht" — what happens to the proceeds from selling the debt-financed rental property. A mere intention to reinvest is not enough: setting the proceeds aside for a rental property "still to be acquired", without actually using them that way, does not satisfy the substitution analysis. In the case decided, the connection ended in the year of sale and three years' interest was lost. The practical consequence: if you intend to reinvest, the purchase has to happen, not be planned — and for as long as it does not happen, the proceeds belong in repayment.
BFH, judgment of 4 February 2020 – IX R 1/18
For a partial sale: apportioning loans to a building that is partly let and partly sold follows the same criteria as for partly owner-occupied buildings. An economic connection exists only where the costs of the two parts are „getrennt ermittelt und entsprechend ausgewiesen" — determined separately and shown accordingly — and the loan funds are actually spent on the let part. For you this means the apportionment is created during the construction phase and in the payment records; after the event it can no longer be established.
Frequently asked questions
I sold outside the ten-year period — does this apply to me too?
Yes. The BFH decided exactly that for the non-taxable sale in IX R 40/14; the connection continues in the sale price „unabhängig von der Frage ihrer Steuerbarkeit", regardless of whether the sale was taxable. The taxability of the sale and the interest deduction are two separate questions.
Must I put the proceeds into repayment even if that realises a loss?
Not at any price. For capital life insurance the BFH held that the priority of debt repayment does not oblige the taxpayer to terminate a policy early where it continues to secure the remaining loan — economically pointless behaviour cannot be expected. A running fixed-interest period, by contrast, is not such a reason.
Does an early repayment penalty count as deductible interest?
No, it follows a rule of its own: under BFH case law an early repayment penalty paid to hand over the property free of encumbrances on a sale is no longer a deductible expense against income from letting. The details are in our article on the early repayment penalty.
For how long can I claim the interest?
For as long as the non-repayable part of the loan exists and the economic connection with it. The case law sets no time limit, but it tests the connection „im Zeitpunkt ihres jeweiligen Entstehens" — at the point each interest payment arises, so afresh every year. If money attributable to the proceeds reaches you in the meantime, the priority of debt repayment applies again.
Loans, outstanding balance and interest per property
RenoDiary tracks loans, amortisation and the outstanding balance for every property — and reminds you before the fixed-interest period ends. When you sell, the figure the priority of debt repayment turns on is already there.
Start for freeSources
- BFH, judgment of 16 September 2015 – IX R 40/14 (post-sale interest after a non-taxable sale; priority of debt repayment) — Bundesfinanzhof (retrieved on 23 October 2026)
- BFH, judgment of 6 December 2017 – IX R 4/17 (scope of the substitution analysis; intention to reinvest) — Bundesfinanzhof (retrieved on 23 October 2026)
- BFH, judgment of 4 February 2020 – IX R 1/18 (apportioning loans on a partial sale) — Bundesfinanzhof (retrieved on 23 October 2026)
- § 9 (1) sentence 1 and sentence 3 no. 1 sentence 1 EStG, § 21 (1) sentence 1 no. 1 EStG, § 23 (1) sentence 1 no. 1 EStG — wording and citations as reproduced in the reasoning of judgment IX R 40/14 (retrieved on 23 October 2026)
- Federal Ministry of Finance circular of 27 July 2015, BStBl I 2015, 581 (application by the tax authorities) — as quoted in judgment IX R 40/14, at 1. and 1.1 (retrieved on 23 October 2026)
This article offers general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Whether and to what extent post-sale interest is deductible depends on the individual case; the figures in the worked example are arithmetic illustrations, not benchmarks. The interest rate and marginal tax rate assumed are freely chosen.