Rental Properties – Interest Deductibility Rules

20 March 2022

The initial effects of Government’s proposal in March 2021 to remove the ability to deduct mortgage interest on rental properties will be felt by taxpayers with residential rental properties in their 2021-22 income tax year. Property rented out some of the time, including holiday homes, will also be affected by the rule change. This is likely to result in higher income tax payments for taxpayers owning residential rental properties.


The interest deductibility rules means that Interest deductions on residential 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, but the interest deductions will be phased out over a four-year period between 1 October 2021 and 31 March 2025.


The phase-out period means that in the following income years landlords can make these interest deduction claims:

  • 1 October 2021 to 31 March 2022 – 75%
  • 1 April 2022 to 31 March 2023 – 75%
  • 1 April 2023 to 31 March 2024 – 50%
  • 1 April 2024 to 31 March 2025 – 25%
  • 1 April 2025 onwards – 0%


If money is borrowed on or after 27 March 2021, to maintain or improve property, rather than subject to the phase-out rule, the interest on those newly borrowed funds will not be able to be claimed as a deduction from 1 October 2021.


An exclusion will apply for ‘new-builds’.  This includes purpose-built rentals and social housing as the Government hopes that this will stimulate investment in new housing. Purpose-built rentals are large residential developments designed for ongoing rental, rather than sale.

 

For any new-build, a property that received its code compliance certificate on or after 27 March 2020 will be eligible to deduct interest for up to 20 years from the time the property’s code compliance certificate is issued. The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20-year period.

Property developers should not be affected by these changes and will still be able to claim interest as an expense.


Interest deductions will continue be available in full for the following types of property:

  • A portion of the main home if it is used to earn income (for example, from flatmates or boarders).
  • Properties used as business premises (except for an accommodation business), like offices and shops. This includes residential properties to the extent they are used as business premises (for example, a house converted into a doctor’s surgery).
  • Hospitals, hospices, nursing homes, and convalescent homes.
  • Retirement villages and rest homes.
  • Hotels, motels, hostels, inns, campgrounds.
  • Houses on farmland.
  • Bed and breakfasts where the owner lives on the property.
  • Employee accommodation.
  • Student accommodation.
  • Land outside New Zealand.
  • Māori collectively owned land and housing.
  • Emergency, transitional, social, and council housing.


The change to the interest deductibility rules will be a concern for many landlords as it increases the amount of tax owed each year and investors will need to pay for the interest costs incurred out of income that they have already paid tax on. An unintended consequence may be that existing landlords increase rents to cover the increased costs of ownership for the lost interest claim.


If you are uncertain of how this policy change may affect you or you have any questions on this or other tax matters, please contact us. Our team is here to provide any assistance you may need.

Becoming an employer of choice

15 October 2025
How to attract great people to your business and how to keep them. Three tips to help you rise to the challenge to become an employer of choice.

What the IRD Expects from You as an Employer

10 October 2025
As an employer, there are several obligations and expectations set by the Inland Revenue Department (IRD) that you must adhere to. Understanding these requirements is essential for maintaining compliance and avoiding any potential penalties. Let's take a closer look at what the IRD expects from you as an employer. Register as an Employer Before you hire your first employee, you are required to register as an employer with the IRD. This is a crucial first step in ensuring that you can meet all tax and payroll obligations. Accurate Record Keeping The IRD requires you to keep accurate and detailed records of all employment-related transactions. This includes: Employee personal details Wages and salary paid Payroll dates and methods PAYE deductions and remittances Details of benefits or allowances provided to employees Maintaining proper records helps ensure that you are reporting and remitting the correct amounts to the IRD. Deduct PAYE Tax You are responsible for deducting PAYE (Pay As You Earn) tax from your employees' pay. This involves calculating the correct amount of PAYE and ensuring it is deducted from each employee's salary or wages before their net pay is provided. Pay Employer Contributions In addition to PAYE, you may also be responsible for contributing to your employees' social security and retirement benefits, depending on the country you operate in. These contributions are typically paid in conjunction with PAYE tax. Issue Statements and Forms At the end of the tax year or upon employment termination, you should provide each employee with a statement showing their total earnings and PAYE deductions. Additionally, filing the appropriate end-of-year PAYE schedules with the IRD is required. File Employer Returns Employers are required to file regular returns with the IRD, which could be monthly, quarterly, or annually, depending on specific regulations. These returns should accurately report all payroll activities, including PAYE deductions. Handle Tax Codes and Changes It's crucial to apply the correct tax codes for each employee's circumstances. Any changes in employment status or tax code must be updated promptly to ensure accurate tax withholdings. Comply with Audit Requests The IRD may audit your business to ensure compliance with employer obligations. As such, being prepared to provide all requested information and records in a timely manner is vital. Adhering to these expectations from the IRD is not just about compliance; it's about fostering a transparent and trustworthy relationship with your employees and the tax authorities. If you need assistance with understanding or managing your obligations as an employer, consider reaching out to a professional accountant. Our team is here to help you navigate these responsibilities seamlessly, ensuring peace of mind and allowing you to focus on growing your business. Feel free to contact us for further information or assistance.

Starting a sole trader business

7 October 2025
Thinking of starting your own sole trader business? The Sole Trader Toolkit from the Ministry of Business, Innovation and Employment has all the basic advice you might need.
SHOW MORE

To discuss all your account matters please call us on 09 438 1001