Interest Deductibility NZ

Background: Interest Deductibility Before the Changes

Prior to the introduction of the interest limitation rules in 2021, landlords were able to deduct mortgage interest payments as an expense when calculating taxable income from rental properties.

This meant that landlords could claim a tax deduction for their mortgage interest, reducing their overall tax liability. Deducting the interest expense on rental properties was common practice, making rental property investment more attractive.

However, in March 2021, the New Zealand government announced that interest would no longer be tax deductible for residential investment properties purchased after 27 March 2021.

For properties purchased before this date, the ability to claim mortgage interest deductions was phased out progressively.

Interest Deductibility in NZ 2025: The Reversal of Interest Limitation Rules

As of 1 April 2024, the new government has reinstated interest deductibility for rental properties. The phased reintroduction of the interest deduction means that by 1 April 2025, landlords will again be able to claim 100% of their mortgage interest tax deduction.

For the 2023/24 tax year, investors could claim 50% of their mortgage interest for investment property.

In 2024/25, this increases to 80%, and by 1 April 2025, 100% of rental property interest deduction will be restored.

Example: How Mortgage Interest Deduction Works

Let’s say an investor owns a rental property with a mortgage of $500,000 at an interest rate of 6% per annum. The annual mortgage interest expense is:
$500,000 × 6% = $30,000

Under the phased reinstatement of the rental property mortgage interest deduction:

• 2023/24 tax year: 50% deductible → $15,000 claimable
• 2024/25 tax year: 80% deductible → $24,000 claimable
• 2025/26 tax year onwards: 100% deductible → $30,000 claimable

This means that by 2025, the entire $30,000 mortgage interest expense will be deductible against rental income, significantly reducing taxable income and tax liability for landlords.

What This Means for Property Investors

The return of mortgage interest tax deduction in NZ is a welcome change for property investors, as it restores a key financial advantage of owning rental properties. Claiming interest on an investment property can now provide greater tax relief, improving cash flow and making rental property investment more sustainable.

However, the reinstatement of mortgage interest deductibility should be carefully considered alongside other tax obligations, such as depreciation and bright-line property rules. Property investors must ensure they are correctly calculating mortgage interest deductions and complying with tax requirements.

Seek Professional Tax Advice

With the ever-changing landscape of property taxation in New Zealand, it is essential to seek expert advice. A qualified chartered accountant can assist in calculating your mortgage interest deduction accurately and ensure compliance with tax laws.

Whether you are considering purchasing a rental property or already own one, professional tax guidance can help you maximise deductions while avoiding potential tax pitfalls.

If you own a rental property and need assistance with your tax returns, consulting with a tax professional will ensure you make the most of available deductions while staying compliant with Inland Revenue’s requirements.

You may also wish to read our article Tax on Rental Income: A Guide for Landlords for further information about the tax implications of owning rental properties.