Interest deductions on residential property income - Proposed changes

The current law:
Currently when owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay. 

What is being changed:
The Government has changed the rules that will disallow property owners to claim interest on loans used for residential properties as an expense against their income from those properties phased in over the next four years.

The Government will consult on the detail of these proposals and legislation will be introduced shortly thereafter. Consultation will cover an exemption for new builds acquired as a residential investment property, and whether all people who are taxed on the sale of a property (for example under the bright-line tests) should be able to deduct their interest expense at the time of the sale. More information can be found at taxpolicy.ird.govt.nz

The legislation will apply from 1 October 2021.

Interest deductions on residential investment property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense. However, the amount you can claim will be reduced over the next 4 income years until it is completely phased out, as shown in the table below. This means that in the 2025–26 and later income years, you will not be able to claim any interest expense as deductions against your income.



If money is borrowed on or after 27 March 2021 to maintain or improve property acquired before 27 March 2021, it will be treated the same as a loan for a property acquired on or after 27 March 2021. Interest on it will not be able to be claimed as an expense from 1 October 2021. Property developers (who pay tax on the sale of property) will not be affected by this change. They will still be able to claim interest as an expense.