Interest deductibility has long been a strategy used by New Zealand real estate owners to optimise cash flow and manage tax obligations. Due to this financial benefit, landlords can lower their taxable income by deducting the interest component of their mortgage payments from rental revenue. The regulations pertaining to interest deductibility have changed significantly in recent years.
The most recent changes are broken down here, along with what is now deductible, what exemptions apply, and how real estate investors can react.
What Is Interest Deductibility?
Landlords can claim mortgage interest as a tax-deductible expenditure thanks to interest deductibility. This has commonly aided many investors in improving cash flow, offsetting rental revenue, and increasing the financial sustainability of property ownership.
In 2021, the previous Government introduced a staged reduction in interest deductibility for residential investment properties. This applied to properties purchased before 27 March 2021 that were not classified as new builds.
The staged reductions were:
In early 2024, these rules were overturned. From 1 April 2024, the following now applies to all residential investment properties:
Source: Inland Revenue
These updated rules apply regardless of when the property was purchased or the loan was taken out.
While interest deductibility has been restored for all residential investment properties, certain exemptions are still relevant.
New builds continue to offer specific benefits. A property is typically considered a new build if it is a self-contained dwelling that received a Code Compliance Certificate (CCC) on or after 27 March 2020. These properties qualify for full interest deductibility for 20 years from the date the CCC is issued. This benefit transfers to subsequent owners during the 20-year period.
Other property types that may remain exempt from residential interest limitation rules include:
The reinstatement of interest deductibility improves financial outcomes for many landlords. Mortgage interest can now be claimed again, which reduces taxable income and improves cash flow.
To make the most of these changes, investors should:
While interest deductibility has been restored, accurate record-keeping is still essential. The Inland Revenue Department (IRD) requires documentation that confirms mortgage interest is linked to the income-generating property.
To remain compliant:
Using cloud-based software or working with a professional property manager can help streamline documentation and reporting.
With full interest deductibility on the horizon, property investors can take steps to enhance their financial position.
In addition to mortgage interest, investors can continue to claim a range of operating expenses. These include:
Understanding and claiming all available deductions helps reduce tax obligations and improve cash flow.
With mortgage interest deductibility restored to 80% from 1 April 2024 and full deductibility returning to 100% from the start of this April, the landscape is shifting in favour of property investors once again. If you own an investment property or are planning to expand your portfolio, now is the time to review your structure, finances, and long-term strategy.
At NZ Realty, we understand the property market and can guide you through the implications of these tax changes. Talk to us today for support with managing your rental property or growing your investment portfolio.
