Tax Relief on the Horizon? How Proposed Mortgage Interest Deduction Could Reshape Peru’s Income Tax Landscape
Imagine a scenario where owning a home in Peru doesn’t just represent a significant life achievement, but also a tangible reduction in your annual tax burden. This could become reality if recent legislative proposals gain traction, potentially offering workers a substantial increase in deductible expenses. Currently, many Peruvians find their legitimate expenses exceed the allowable tax deductions, leaving money on the table. Now, lawmakers are considering expanding those deductions, with a particular focus on mortgage interest – a move that could have ripple effects throughout the economy.
The Core of the Proposal: Aligning Worker Deductions with Corporate Practices
The debate centers around Bill No. 12277/2025-CR, presented by Congressman Diego Bazán of Renovación Popular. The fundamental principle behind the bill, as Bazán articulated, is to mirror the tax treatment afforded to companies. Businesses deduct all legitimate expenses before calculating taxable income. Currently, Peruvian workers are limited to a fixed deduction of 7 UIT (Unidad Impositiva Tributaria) annually, with an optional additional deduction of up to 3 UIT for specific expenses like restaurant bills, hotel stays, and professional service fees – totaling a maximum of 10 UIT. Bazán’s proposal aims to significantly increase this potential deduction.
“In companies, all expenses are deducted before paying taxes, since they are taxed on net profits,” Bazán stated during a recent Congressional Economy Commission session. His bill proposes adding an *additional* 3 UIT deduction specifically for mortgage interest, on top of the existing 3 UIT for other eligible expenses. This could bring the total potential deduction to 13 UIT, offering substantial tax relief to homeowners.
A History of Deduction & Reversal: Learning from Past Mistakes
The idea of deducting mortgage interest isn’t new in Peru. A similar deduction was available in 2016 but was subsequently withdrawn two years later. The reason? It proved too popular, with many taxpayers maximizing the 3 UIT additional deduction solely through mortgage interest, diminishing the incentive to claim deductions for other expenses aimed at formalizing economic activity. This time, lawmakers are attempting to avoid that pitfall.
Key Takeaway: The current proposal specifically seeks to avoid disincentivizing the formalization of other economic activities by making the mortgage interest deduction *independent* of the existing 3 UIT additional deduction.
Expert Agreement: A Step Towards Tax Fairness
The proposal has garnered support from tax experts. Giorgio Balza, a tax lawyer at Cuatrecasas, agrees with the principle, arguing that the current 10 UIT deduction often falls short of covering actual expenses. “Currently the expenses end up being greater than what you are allowed to deduct. In other countries you can deduct educational expenses; not here. So, increasing the expense base, although it does not generate a substantial change, can be a relief (for the worker),” Balza noted.
He further emphasizes the importance of aligning tax treatment for homeowners and renters. “Reincorporating the deduction for mortgage interest respects the principle of taxing the true ability to pay and aligns the tax treatment between those who rent and those who access property.”
Beyond Bazán: A Broader Push for Expanded Deductions
Congressman Bazán isn’t alone in advocating for expanded tax deductions. Rosangella Barbarán of Fuerza Popular has presented a separate bill incorporating seven new deductible expense categories, including mortgage interest. While Barbarán’s bill faced initial hurdles in May 2025 due to concerns over certain proposed deductions (like airfare and veterinary expenses), Bazán believes focusing specifically on mortgage interest offers a path to broader consensus.
Did you know? Peru’s UIT (Unidad Impositiva Tributaria) is an index used to establish the monetary values of tax obligations. Its value is adjusted annually.
Future Implications: A Potential Catalyst for the Housing Market?
If passed, this legislation could have significant implications beyond individual tax savings. A more favorable tax environment for homeowners could stimulate demand in the housing market, potentially leading to increased construction and economic activity. However, it’s crucial to consider the broader economic context.
Expert Insight: “The impact on the housing market will depend on several factors, including overall economic growth, interest rates, and consumer confidence,” says economist Dr. Elena Ramirez. “While the tax deduction could provide a boost, it’s unlikely to be a sole driver of significant market changes.”
The Risk of Inflationary Pressure
Increased disposable income resulting from tax savings could also contribute to inflationary pressures, particularly if supply doesn’t keep pace with demand. The Central Reserve Bank of Peru would need to carefully monitor these effects and adjust monetary policy accordingly.
The Potential for Further Expansion of Deductible Expenses
This debate could open the door to further discussions about expanding the range of deductible expenses for workers. Arguments for including educational expenses, healthcare costs, and even certain types of investments are likely to gain traction, potentially leading to a more comprehensive and equitable tax system.
Frequently Asked Questions
Q: What is the UIT and how is it used?
A: The UIT (Unidad Impositiva Tributaria) is a tax unit used in Peru to standardize tax calculations. Its value is adjusted annually and serves as the basis for determining tax obligations, deductions, and penalties.
Q: Will this deduction apply to all types of mortgages?
A: The specifics of the legislation are still being debated, but it’s expected to apply to most standard mortgage loans used for primary residences.
Q: When could this law potentially take effect?
A: Congressman Bazán’s bill is expected to be voted on in an upcoming session of the Congressional Economy Commission. If approved, it would then proceed to a full congressional vote. The timeline for implementation is uncertain.
Q: What other expenses are currently deductible in Peru?
A: Currently, workers can deduct up to 3 UIT for expenses such as restaurant bills, hotel stays, formal housing rental costs, and professional service fees, in addition to the fixed 7 UIT deduction.
The proposed changes to Peru’s income tax system represent a significant step towards aligning tax policies with economic realities. While challenges remain, the potential benefits – increased tax fairness, a stimulated housing market, and a more equitable tax burden – are substantial. The coming months will be crucial as lawmakers debate and refine these proposals, shaping the future of taxation for Peruvian workers.
What are your thoughts on this proposed tax change? Share your perspective in the comments below!