Interest Deductibility
Interest deductibility refers to the ability of property owners to deduct the interest paid on their mortgage loans from their taxable income. It’ s a crucial element that can affect the viability of any investment property and an area of taxation that has seen ongoing changes.
Claiming interest as an expense for residential property in New Zealand has been phased back in. From 1 April 2024, you could claim 80 % of the interest incurred for funds borrowed for residential property( regardless of when the property was acquired or when the loan was drawn down).
On 1 April 2025 interest deductibility was fully restored, and you are able to claim 100 % of the interest incurred.
WHAT TYPES OF INTEREST COSTS ARE DEDUCTIBLE? Landlords can deduct their interest costs if the lending is used for two key purposes:
• Interest on loans for rental property purchase: If you took out a loan to purchase a rental property, generally the interest on that loan is tax deductible.
• Interest on loans for property improvement: If a loan is taken specifically to make improvements to your rental property, the interest on that loan is also tax deductible in most cases. rvice department.
IMPORTANT CONSIDERATIONS The rules around interest deductibility still contain nuances that all landlords should be aware of and we recommend you seek professional advice, particularly if some of the following components relate to your property:
• Other Exemptions: There can be various other exemptions in place relating to interest deductibility, depending on the circumstances. These can include exemptions for property development, emergency housing, new build properties, and different ownership entities.
• Loan Allocation: If you have a mortgage covering both your rental property and personal use, you must correctly allocate the interest portions for each to ensure you only claim deductions for the interest related to your rental property.
• When a property is sold: The rules for disallowed interest deductions when a property is sold are remaining. This means, if the sale of a property is taxable under the bright-line property rule or 1 of the other land sale rules, the amount of the previously disallowed interest can be treated as if it were part of the cost of the property in the year you sell it.
• Main Homes: Your main home and place of residence remain unaffected by any interest deductibility changes, and you cannot deduct interest on a property used for private use.
GENERAL ADVICE Interest deductibility can have a significant impact on the financial performance of your investment property and your overall tax costs. We recommend keeping detailed and accurate records of all transactions relating to any propertyassociated lending and seeking professional advice to achieve the best financial outcome for you.
INVESTMENT INFORMATION GUIDE 11