Deducting Loan Interest on Mixed-Use Property in Germany
A two-family house, owner upstairs, tenant downstairs: one loan, one notary appointment, one transfer. What happens next in the tax return surprises many owners — the tax office recognises only a fraction of the interest, and it does so permanently. With exactly the same money, almost the full deduction would have been available. The difference is not made at the accountant's desk; it is made on the day the purchase price is paid.
Why the interest gets split at all
For tax purposes a mixed-use property is not one asset but two. The let part produces income from letting and leasing under § 21 (1) sentence 1 no. 1 EStG (Einkommensteuergesetz, the German Income Tax Act). The owner-occupied part produces no income at all; its costs are private living expenses, and § 12 no. 1 EStG rules out any deduction for them.
Interest follows that split. Under § 9 (1) sentence 3 no. 1 EStG, deductible expenses (Werbungskosten) include "interest on debt […] in so far as it is economically connected with a category of income". What matters, therefore, is neither how much you borrowed nor what you intended — it is what the borrowed money actually paid for.
That is where the leverage sits. Borrow €300,000 and demonstrably pay for the let part of the building with it, and the interest is fully deductible. Pour the same €300,000 into one pot together with your own funds and pay for the whole house from it, and you have created an economic link to both parts — leaving you with a share.
The two steps the Federal Fiscal Court requires
The Ninth Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH) set out the test in a 2020 decision published in the official tax gazette. An economic connection between the interest and the let part of the building exists only where that part's costs are "determined separately and shown accordingly, and the taxpayer then actually pays, out of the funds received as a loan, those expenses" attributable to that part. Two steps, and both have to hold:
- Separate on paper. The purchase contract — or, for a new build, the construction cost schedule — states which amount falls on the let part and which on the owner-occupied part. The split has to be defensible: anchored to floor areas or values, not picked freely.
- Separate at the bank. The loan proceeds pay exactly that stated part-amount, and your own funds pay the other. Two transfers, ideally from two accounts, with a payment reference that names the allocation.
What happens when everything runs through one account
Where loan proceeds and own funds come together in one account and the purchase price is transferred from there as a single amount, it is no longer possible to see which money paid for which part of the building. The BFH calls this a commingling of funds, which as a rule rules out any targeted allocation. The consequence appears in the reasoning: interest can then be attributed to deductible letting expenses "only in proportion to the usable floor area of the owner-occupied and the let part".
Two details of this are routinely missed. First, the yardstick is usable floor area — not the value stated in the purchase contract and not the living area. A generous value assigned to the let unit no longer helps you at this point. Second, the situation is final: the Senate held that terminating a loan agreement with effect for the future is not an event with retroactive effect. Refinancing merely swaps one set of funds for another; the original use stays attached to them.
Put plainly: there is no repair. The allocation decision is taken once, when the purchase price is paid, and it governs the entire life of the financing.
What the mistake costs
A two-family house for €500,000 with 200 m² of usable floor area, of which 120 m² are let and 80 m² owner-occupied. The purchase contract splits the price by area: €300,000 on the let unit, €200,000 on the owner's. Financing is €300,000 of debt at 3.8% plus €200,000 of equity.
| Route A: paid separately | Route B: all through one account | |
|---|---|---|
| Loan | €300,000 | €300,000 |
| Interest per year (3.8%) | €11,400 | €11,400 |
| Yardstick | actual use of funds | usable-area share 60% |
| Deductible | €11,400 | €6,840 |
| Difference per year | — | €4,560 |
€4,560 less in deductible expenses means roughly €1,915.20 more income tax per year at an assumed personal marginal rate of 42% — every year. Across a ten-year fixed-rate period that is about €19,152, for a decision that hung on a single transfer slip. These figures are a worked example, not a tax computation; your actual marginal rate may differ considerably.
The exception that rescues a lot of cases
Practice is not quite that strict where the payment trail can be followed without gaps. Where the loan proceeds are passed through a private current account on the same day and in an identical amount, and are used from there to pay for the letting property, the actual use is treated as proven — despite the commingling. In 2022 the Senate confirmed this even where several properties are acquired at once and several loans are passed through on the same day.
In practice: if a second account really cannot be arranged, at least make sure the loan amount goes in and out on the same day and in the same amount, and that the bank statements show it. A loan that sits on the current account for three weeks and then disappears into a bulk transfer, by contrast, is close to unsalvageable.
Six points for the notary appointment
- Split the purchase price in the contract between the let and the owner-occupied part — defensibly, by area or value, and reasoned in the contract itself.
- Document the usable floor areas of both parts properly; they are the fallback yardstick.
- Take a separate loan for the let part, equal to that part-price and never higher.
- Use a second account for the loan proceeds — the single most effective step.
- Make two transfers with a meaningful payment reference instead of one bulk payment.
- File bank statements, loan agreement and purchase contract together; the evidence will be asked for years later.
How the purchase price additionally has to be split between land and building is covered in our article on allocating the purchase price to land and building — both allocations arise in the same contract and belong together. Where the interest ends up later is shown in our guide to completing Anlage V, and what a lost interest deduction does to the running numbers is worked through in calculating a property's cash flow.
What the courts have decided
The statute says only that an economic connection must exist. How you create it — and how you destroy it — appears exclusively in the case law of the Ninth Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH).
BFH, judgment of 4 February 2020 – IX R 1/18 (officially published)
The leading decision on the test. An economic connection exists only where the costs of the let and the non-let parts of the building are determined and shown separately and the taxpayer then actually pays, out of the loan proceeds, those expenses attributable to the let part. The case concerned a building that was partly let and partly sold; in its first headnote, however, the Senate expressly states that the criteria are those it developed for buildings that are partly let and partly owner-occupied. For you this is the bar: intention is not enough, a documented payment is.
BFH, judgment of 12 March 2019 – IX R 2/18 (not officially published)
The expensive standard case. A separate attribution of the loan to the let part is ruled out where the entire purchase price is transferred from a current account on which own and borrowed funds have become commingled; the interest is then deductible only in proportion to the usable floor areas. The Senate also held that terminating a loan agreement with effect for the future is not an event with retroactive effect — so refinancing does not cure the mistake. The decision is not officially published and directly binds only the case decided; it does, however, follow the line of the published judgment IX R 1/18.
BFH, judgment of 3 May 2022 – IX R 34/19 (not officially published)
The other direction. The actual use of the loan proceeds is proven despite commingling with private funds where they are passed through a private current account on the same day and in an identical amount — and that holds even where several properties are acquired at once and several loans are passed through in this way. Also not officially published, but in practice the most important lifeline for anyone who has only one account.
Frequently asked questions
Is it enough to state "to finance the let flat" in the loan agreement?
No. The stated purpose is an indication, but the BFH requires the payment to actually be made out of the loan proceeds. A declaration of purpose on its own is an act of will and does not create the economic connection.
Can I correct the allocation later by refinancing?
No. Terminating the old loan agreement takes effect only for the future and is not an event with retroactive effect. The new funds step into the place of the old ones and take on their use.
May the loan exceed the part-price of the let unit?
Any excess necessarily finances something else and loses its connection to the letting. Keep the loan at or below the stated part-price.
Does this apply to a new build as well as a purchase?
Yes. The leading decision IX R 1/18 concerned construction costs. Instead of a split in the purchase contract, the construction costs of the two parts have to be determined and shown separately — and the invoices for the let part paid out of the loan proceeds.
What about a home office or a flat let to relatives?
The basic pattern is unchanged: what counts is what the borrowed money paid for. Letting to relatives, however, additionally triggers the consideration test in § 21 (2) EStG — see our article on letting below market rent to relatives.
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- § 9 EStG (deductible expenses, interest on debt) — Gesetze im Internet (retrieved on 10 September 2026)
- § 21 EStG (income from letting and leasing) — Gesetze im Internet (retrieved on 10 September 2026)
- § 12 EStG (non-deductible private living expenses) — Gesetze im Internet (retrieved on 10 September 2026)
- BFH, judgment of 04.02.2020 – IX R 1/18 (separate determination and actual payment out of loan proceeds) — full text at the Federal Fiscal Court (retrieved on 10 September 2026)
- BFH, judgment of 12.03.2019 – IX R 2/18 (commingling on a current account, no retroactive event) — full text at the Federal Fiscal Court (retrieved on 10 September 2026)
- BFH, judgment of 03.05.2022 – IX R 34/19 (same-day, amount-identical pass-through) — full text at the Federal Fiscal Court (retrieved on 10 September 2026)
This article offers general orientation and does not replace individual tax or legal advice within the meaning of § 3 StBerG. Whether a particular split is defensible, and how the payment route should be structured, should be settled with your tax adviser before the notary appointment.