Mortgage interest deductibility for residential rental properties has been one of the most controversial tax policy areas in New Zealand over the past decade. After being phased out by the previous government, it has now been fully restored. This guide explains the history, the current rules, and what it means for property investors.
What Is Interest Deductibility?
When you borrow money to earn income, you can generally deduct the interest cost from that income for tax purposes. For a rental property investor, this means the mortgage interest paid on the rental property can be deducted from rental income, reducing the taxable profit.
Example (with full deductibility):
- Rental income: $36,000/year
- Mortgage interest: $28,000/year
- Other expenses (rates, insurance, repairs): $8,000/year
- Taxable rental profit: $36,000 − $28,000 − $8,000 = $0 (break-even — no tax on rental income)
Without interest deductibility:
- Rental income: $36,000
- Other expenses (no interest): $8,000
- Taxable rental profit: $28,000 → Tax at 33% = $9,240/year tax bill
The difference is enormous — particularly for highly leveraged investors with large mortgages.
The Phase-Out (2021–2024)
In March 2021, the Labour Government announced the removal of interest deductibility for residential investment properties, effective from 1 October 2021. The policy was phased in over several years:
| Period | Deductibility % |
|---|---|
| To 30 September 2021 | 100% (unchanged) |
| 1 Oct 2021 – 31 Mar 2023 | 75% |
| 1 Apr 2023 – 31 Mar 2024 | 50% |
| 1 Apr 2024 – 31 Mar 2025 | 25% |
| 1 Apr 2025 onwards (under old policy) | 0% |
The phase-out was intended to reduce investor demand in the property market and improve housing affordability for owner-occupiers.
The Reversal (2024–2026)
The National-led Government elected in October 2023 reversed the interest deductibility policy. Under the new policy:
| Tax year | Deductibility % |
|---|---|
| 2023–24 | 50% |
| 2024–25 | 80% |
| 2025–26 onwards | 100% |
From 1 April 2025, New Zealand residential property investors can again deduct 100% of mortgage interest on rental properties against their rental income.
This is fully legislated and in force. There is no planned reversal under the current government.
Who Does Deductibility Apply To?
Eligible: Residential rental properties — homes rented out under a tenancy agreement
Not eligible: Your owner-occupied home. Mortgage interest on your personal residence has never been deductible in New Zealand (unlike some countries where home mortgage interest is deductible).
Mixed-use properties: If you rent out part of your home (e.g., a granny flat), deductibility applies proportionally to the rented portion.
Short-term accommodation (Airbnb, Bookabach): Deductibility depends on the nature and amount of personal use. Pure rental (no personal use) allows full deductibility. Mixed personal/rental use is proportional.
New builds: New builds have always been exempt from the interest deductibility restriction — even during the phase-out period 2021–2025, investors in new builds retained 100% deductibility.
What Expenses Are Deductible on a Rental Property?
Beyond mortgage interest, landlords can deduct:
| Expense | Deductible? |
|---|---|
| Mortgage interest | Yes (100% from 2025–26) |
| Council rates | Yes |
| Insurance | Yes |
| Property management fees | Yes |
| Repairs and maintenance | Yes (repairs; not capital improvements) |
| Accountant fees (rental related) | Yes |
| Depreciation (chattels) | Yes (carpets, appliances, etc.) |
| Building depreciation | No (was removed 2011) |
| Capital improvements | No (add to cost base for bright-line purposes) |
Bright-Line Test and Capital Gains
Interest deductibility reduces your rental income tax each year. But note: New Zealand also has a bright-line test — properties sold within a set period of purchase are subject to income tax on the capital gain.
Current bright-line period: 2 years (reduced from 10 years under the previous government, effective for sales from 1 July 2024).
A property held for more than 2 years is generally not subject to the bright-line. There are exceptions (changes in use, inherited property, etc.) — confirm with a tax adviser.
Practical Impact for Investors
With full interest deductibility restored from 2025–26, the after-tax return on investment properties has significantly improved. An investor with:
- $600,000 mortgage at 5.55%
- Annual interest: $33,300
- Rental income: $40,000
- Other expenses: $10,000
Pre-2021 (and from 2025–26): Taxable profit: $40,000 − $33,300 − $10,000 = -$3,300 (tax loss) Tax payable: $0 (loss can offset other income or be carried forward)
During phase-out (at 25%, 2024): Deductible interest: $33,300 × 25% = $8,325 Taxable profit: $40,000 − $8,325 − $10,000 = $21,675 Tax at 33%: $7,153
The difference: $7,153/year in additional tax during the phase-out vs zero tax now. The restoration of deductibility is worth thousands per year per property.
Ring-Fencing of Rental Losses
Rental losses (where expenses exceed income) cannot be used to offset salary and wage income. Since 2019, rental losses are “ring-fenced” — they can only be used against rental income from other properties or carried forward to offset future rental income from the same portfolio.
This means an investor in a negative cash flow position can’t use rental losses to reduce their PAYE tax — a restriction that has applied regardless of the interest deductibility rules.
Getting Advice
Rental property taxation is complex. The interaction of interest deductibility, bright-line test, ring-fencing, GST (if applicable for short-term rentals), depreciation, and entity structure (personal name, company, trust) means professional advice is usually worthwhile.
Talk to a tax accountant with property investment experience before making significant investment decisions. IRD also publishes guidance at ird.govt.nz.
Further Reading
- Investment Property Mortgage NZ — full investment property finance guide
- Rental Property Mortgage NZ — rental property lending in detail
- Investment Property LVR NZ — deposit and LVR rules for investors
- New Build Mortgage NZ — investors and new builds
- Mortgage Hub — all NZ mortgage guides