Mortgage interest deductibility for residential rental properties has been one of the most significant and contested areas of NZ tax policy over the past five years. After a complete phase-out under the Labour government and a phased restoration under National, interest is now fully deductible from 1 April 2025. Here is the complete story and what it means for your tax position.
From 1 April 2025, mortgage interest on all residential rental properties is 100% deductible — including existing properties that were previously restricted. You claim the full interest amount on your IR3. No percentage rules apply. New builds have been fully deductible throughout. Get your annual interest statement from your bank and claim the total.
The Full Timeline
| Date | Policy | Existing properties | New builds |
|---|---|---|---|
| Pre-27 Oct 2021 | No restrictions | 100% deductible | 100% deductible |
| 27 Oct 2021 | Phase-out begins | 0% deductible (interest incurred after this date) | 100% deductible |
| 1 Apr 2022 | Phase-out year 1 | 75% deductible (loans drawn before 27 Oct 2021) | 100% deductible |
| 1 Apr 2023 | Phase-out year 2 | 50% deductible | 100% deductible |
| 1 Apr 2024 | Phase-back begins | 80% deductible (National government reversal) | 100% deductible |
| 1 Apr 2025 | Full restoration | 100% deductible | 100% deductible |
What Is Deductible
You can deduct:
- Interest on mortgages used to purchase residential rental property
- Interest on loans used to fund improvements to rental property
- Interest on top-up loans where the funds were used for the rental property
You cannot deduct:
- Interest on loans used for personal purposes (even if secured against the rental property)
- Principal repayments (never deductible — only interest)
- Break fees on fixed mortgages (these may be deductible over the remaining fixed term, not all at once)
Mixed-Purpose Loans
If you have a loan that funds both your rental property and personal property (common with revolving credit or offset mortgages), you must split the interest:
- Only the proportion attributable to the rental property is deductible
- Keep clear records of how funds were used
- If funds were drawn for mixed purposes, use the loan balance proportion
Example: You have a $500,000 revolving credit. $350,000 is attributable to your rental property, $150,000 to your home. You can deduct 70% of the interest ($350k/$500k).
How to Calculate Your Deductible Interest
- Get your annual loan statement from your bank (most banks provide this in January for the previous calendar year, or on request for the tax year)
- The statement shows total interest charged during the period
- If the loan is 100% for your rental property, the full interest amount is deductible
- If mixed-purpose, apply the rental proportion
Most banks provide this figure clearly. For the NZ tax year (1 April – 31 March), the interest period may not align perfectly with the bank’s calendar year statement — you may need to add/subtract a quarter’s interest.
Where to Claim on Your IR3
On your IR3:
- Go to the rental income section
- Enter Total gross rent received
- Enter each deductible expense, including interest
- Net rental income = Rent − All expenses (including interest)
- Net income flows through to your total income for tax
If your rental property is owned in a company or trust, the entity files its own return and claims interest deductions there.
Impact on After-Tax Returns
The full restoration of interest deductibility significantly improves landlord economics. Example:
| Scenario | Gross rent | Interest | Other expenses | Net income (taxable) | Tax at 33% |
|---|---|---|---|---|---|
| Pre-2021 (100% deductible) | $30,000 | $20,000 | $5,000 | $5,000 | $1,650 |
| 2022–23 (0% deductible) | $30,000 | $0 deductible | $5,000 | $25,000 | $8,250 |
| 2025–26 (100% restored) | $30,000 | $20,000 | $5,000 | $5,000 | $1,650 |
The swing from 0% to 100% deductibility represents $6,600/year in tax savings in this example — at a 33% marginal rate.
New Builds: Always Fully Deductible
New builds (properties first acquired as new builds, built by the owner, or purchased off the plan) retained 100% interest deductibility throughout the 2021–2025 phase-out period. This was a deliberate policy to encourage new housing supply.
From 1 April 2025, the distinction between existing properties and new builds is eliminated — both are now 100% deductible.
Frequently Asked Questions
Can I claim interest on a loan to purchase another property as my rental mortgage?
Only if the funds were actually used to acquire or improve the rental property. IRD follows the “nexus” or “use of funds” test — the loan must be connected to the income-earning property. Taking equity from your family home to buy a rental? The interest on that equity draw, to the extent it funds the rental, is deductible.
What if I refinanced my rental mortgage — does deductibility still apply?
Yes, as long as the refinancing simply replaces the existing rental loan (same or lower principal). If you top up the loan and use the extra funds for personal purposes, only the rental portion remains deductible.
My partner and I jointly own the rental. How do we split the interest deduction?
Each joint owner claims their ownership proportion. If you own 50/50, you each claim 50% of the total deductible interest on your respective IR3 returns.
Can I claim interest on credit card debt used for rental repairs?
Yes, if the credit card was used specifically for rental-related expenses. The interest on the balance attributable to rental purchases is deductible. This requires good record-keeping to establish the nexus.