Court Decision on Deductions Allows 3% Mortgages

If they move fast, tax-savvy home buyers can take advantage of a 1999 Supreme Court decision that effectively reduces real annual interest rates on mortgage loans to 3 percent, real estate experts have said.

Right now, local banks are making mortgage loans at annual rates of 15 percent, but nearly all of that can be written off thanks to a Supreme Court decision overturning government limits on tax breaks.

"If a borrower takes out a [mortgage] loan at an annual rate of 15 percent and takes advantage of the income tax break, he'll actually only be paying an annual rate of only 3 percent," said James Cook, senior vice president of the U.S. Russia Investment Fund. "He'll save the remainder of his mortgage payments in tax write-offs."

Until June 1995, the country's tax laws allowed principal and interest payments on mortgage loans to be deducted in their entirety from base income when filing returns for federal income taxes.

At that time, the Federal Tax Service limited tax breaks to a three-year period and a sum of no more than 5,000 federal minimum wages, or approximately $14,000.

However, on Oct. 29, 1998, the Supreme Court declared invalid the section of the official regulations for the State Tax Inspectorate that set the minimum. The decision was upheld by the court's Appellate Council on Nov. 9, 1999.

"This was a violation of the law from the start," said Andrei Nikonov, a law consultant from the FBK company. "One can consider that there are no limits to tax breaks for mortgage loans, and there never were."

Home buyers hoping to take advantage of the breaks will have to act fast, said Yevgeny Sivushkov, a private tax manager at PricewaterhouseCoopers.

"These great tax breaks will last to the end of the year, and then they might change," he said. The government is not about to leave such budget loopholes in place.

Interest rates on the U.S. Russia Investment Fund's Deltakredit mortgage program are at record lows. However, the architects of other mortgage plans are in no rush to advertise the super-low interest rates. One of the problems is that nearly no one is aware of the high court's decision, including many Tax Ministry employees.

"In their first meeting with clients, our specialists recommend that they consider the meaning of the court's decision," said Sobinbank mortgage chief Galina Simonova. "However, they always warn them that the bank cannot guarantee they'll get the full tax break."

Part of the problem is that it was not until this month that the Supreme Court's decision reached regional tax authorities, she said.

Uncertainty remains as to who can interpret the ruling and how, Simonova added.

"Various inspectorates might interpret certain parts of the Supreme Court decision in different ways," she said. "So before taking a bank loan, an accountant or a tax inspector should be consulted on the possibilities for getting the tax break and any possible conditions."