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Aiming to curb soaring house prices, the government has introduced new rules phasing out the ability to deduct loan interest from rental income. For anyone who owns residential rental property, we suggest taking a look at how this change will affect you.

Applicable properties

The interest limitation rules apply to residential property in New Zealand. Any property with a dwelling on it (such as a house or apartment) is subject to these rules, as is bare land that could be used for residential property.

It does not matter whether the property is rented out long or short-term, used for short-stay accommodation some or all of the time, or left vacant. (Note that these rules do not apply to commercial accommodation such as hotels and motels.)

Main homes are generally not affected by these changes as you can’t claim interest deductions for private use.

Phasing out dates

The phasing out of interest deductibility will be backdated to apply from 1 October 2021:

• Residential rental property purchased on or after 27 March 2021, interest cannot be claimed as an expense from 1 October 2021, unless an exclusion or exemption applies.
• For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025 (see the table below).
• Interest deductions for any new loans drawn down on or after 27 March 2021 is not allowed from 1 October 2021 onwards.

Income year and percentage of interest claimable

1 April 2020 – 31 March 2021 – 100%
1 April 2021 – 30 September 2021 – 100%
1 October 2021 – 31 March 2022 – 75%
1 April 2022 – 31 March 2023 – 75%
1 April 2023 – 31 March 2024 – 50%
1 April 2024 – 31 March 2025 – 25%
1 April 2025 onwards – 0%

Exemptions and exclusions

Some types of residential accommodation will be excluded from the interest limitation rules, such as:

• the main home (if used to earn income)
• business premises
• farmland
• various accommodation providers.

There are exemptions for land businesses, residential developments and new builds. In the case of new builds (a property that received its code compliance certificate on or after 27 March 2020), interest is eligible to be deducted for up to 20 years from the time the property’s code compliance certificate is issued. This exemption will apply to both the initial purchaser of the new build and subsequent owners within the 20-year period.

Filing your tax return

From the 2022 income tax year onwards, you will need to take the new interest limitation rules into consideration when completing your income tax return and provide extra details around interest expenses. If you are a residential property owner, we suggest getting in touch with us so we can advise you further.