Mortgage interest deductibility on rental properties was removed in October 2021 and phased back in by the National-led government from April 2023. From 1 April 2026, 100% of mortgage interest on residential rental properties is deductible again.
From 1 April 2026, residential rental investors can deduct 100% of mortgage interest against rental income. This fully reverses the 2021 removal. For a landlord with a $500,000 loan at 6.5%, this represents a $32,500 deduction — saving $10,725/year in tax at 33%. The restoration materially improves rental property cash flow for leveraged investors.
The Deductibility Timeline
| Tax year | % of interest deductible |
|---|---|
| 2020/21 (before October 2021) | 100% |
| 2021/22 (Oct 2021 onwards) | 0% for new rules (phased) |
| 2022/23 | 25% |
| 2023/24 | 50% |
| 2024/25 | 80% |
| 2025/26 and onwards | 100% |
New builds were exempt from the removal and remained 100% deductible throughout.
From 1 April 2026 (the start of the 2025/26 tax year), all residential rental properties return to full deductibility, regardless of when the property was purchased.
What Can Be Deducted?
With full restoration, the following interest costs are fully deductible for residential rental landlords:
- Mortgage interest on the investment property loan
- Interest on a revolving credit facility used for rental property expenses
- Refinancing interest if the new loan is for the same or lesser amount as the existing loan and is used for the same rental property purpose
What cannot be deducted:
- Principal repayments (never deductible)
- Interest on funds drawn from the property loan and used for personal purposes
- Interest on the family home mortgage (personal use)
How Much Is This Worth?
The tax value of full interest deductibility depends on your loan and marginal tax rate.
Example: $600,000 rental property loan at 6.5% interest
| Deductibility | Annual interest | Deductible | Tax saving at 33% |
|---|---|---|---|
| 0% (2021 rules) | $39,000 | $0 | $0 |
| 50% (2023/24) | $39,000 | $19,500 | $6,435 |
| 80% (2024/25) | $39,000 | $31,200 | $10,296 |
| 100% (2025/26+) | $39,000 | $39,000 | $12,870 |
The shift from 80% to 100% deductibility (2024/25 to 2025/26) adds $2,574/year in tax savings on this example property.
The full shift from 0% to 100%: A landlord who was affected by the 2021 removal and now benefits from full restoration has $12,870/year more after-tax cash flow on this example — transformative for cash-flow management.
Ring-Fencing of Rental Losses: Still Applies
Even with full interest deductibility, the ring-fencing rules from 2019 remain in place.
Ring-fencing means:
- Rental losses (where deductible expenses exceed rental income) can only offset other rental income
- You cannot use rental losses to offset salary or self-employment income
- Excess rental losses carry forward to offset future rental income or gains on property sale
Example:
- Rental income: $35,000
- Total deductible expenses (interest $39,000 + other costs $15,000): $54,000
- Rental loss: $19,000
This $19,000 loss is ring-fenced — it cannot reduce your PAYE tax this year. It carries forward to offset future rental income.
Important: This means full interest deductibility improves cash flow but may not immediately reduce your income tax if your property runs at a loss. The benefits are deferred.
New Builds: Were Never Affected
Properties that qualified as “new builds” (first issued code of compliance from 27 March 2020) remained 100% deductible throughout the 2021–2026 removal period.
Investors who specifically purchased new builds between 2021 and 2026 to access this advantage have been at a significant competitive advantage. With all properties returning to 100% from April 2026, this differentiator disappears.
Effect on Rental Property Values
The restoration of interest deductibility has supported property investor demand since 2024. Analysts note:
- Improved investor cash flows → more investors re-entering the market
- Reduced incentive to sell negatively-geared properties
- Some upward pressure on property prices (increased investment demand)
The 2021 removal coincided with a significant property price correction (2022–2023). The phased restoration has been part of the recovery in investor activity since 2024.
What This Means for Your Tax Return
If you own a rental property, from the 2025/26 tax year (1 April 2025 – 31 March 2026):
- Claim 100% of mortgage interest paid during the year in your rental schedule (IR3R)
- If your property produces a rental surplus (income > expenses): taxed at marginal rate
- If it produces a rental loss: ring-fenced, carried forward
Use the IRD’s rental income calculator or work with a tax adviser to ensure correct treatment.
Frequently Asked Questions
Does this apply to commercial property? Commercial property always retained full interest deductibility. The 2021 removal only applied to residential rental property.
I own my rental through a Look-Through Company (LTC) — does this change anything? LTC structures already flowed losses through to shareholders. Full deductibility through an LTC means losses are now larger — but ring-fencing still applies (losses offset only against other rental income or gains).
Can I backdate the deduction? No. The restoration is prospective. You cannot amend prior-year returns to claim deductions that were not available at the time.
What if I use a Line of Credit on my home to fund the rental deposit? You can deduct interest on borrowings used to fund the rental investment, including a top-up loan on your home that is demonstrably used for the rental property. Keep clear records of how the funds were used.