INTEREST DEDUCTIBILITY NZ: THE FULL RULES FOR RENTAL PROPERTY OWNERS

Interest deductibility NZ landlords rely on has changed more than almost any other property tax rule in the past five years. It disappeared almost entirely between 2021 and 2024. Then it came back in stages. Many investors still aren’t sure exactly where things stand. This guide sets out the full history, the current rule, and the details that still catch people out.

30-Second Read

• Interest on residential rental property is 100% deductible from 1 April 2025 onward, for every landlord. It doesn’t matter when you bought the property or drew down your loan.
• Before that, deductibility phased back in gradually: 50% for the 2023–24 year, then 80% for 2024–25.
• This followed a phase-out period from 2021 to 2024. Deductibility shrank to as low as 0% for some properties.
• New builds kept full deductibility throughout the entire limitation period, under a separate exemption.
• Interest you couldn’t claim during the limitation years isn’t necessarily lost. It can sometimes reduce a taxable gain if you later sell under the bright-line test.

We work through how the rules got here, exactly what’s deductible now, the details that trip people up, two worked examples, and a checklist for your next return.

 

What Is Interest Deductibility?

Interest deductibility is simple in concept. Borrow money to buy or improve a rental property, and the interest you pay on that loan counts as a business expense against your rental income. Claim it, and it reduces your taxable rental profit — the same way rates or insurance does.

For most of New Zealand’s tax history, this was uncontroversial. From 2021, though, the government restricted it specifically for residential rental property. No other kind of business borrowing faced the same restriction. That restriction has since been fully repealed. The history still matters, though — it explains why older articles, calculators, and even some accountants’ advice can still describe an outdated position.

How We Got Here: The Phase-Out (2021–2024)

On 23 March 2021, the government announced that interest on loans for residential rental property would stop being deductible. The rules that followed treated two groups differently.

Properties acquired on or after 27 March 2021 lost interest deductibility immediately, from 1 October 2021. No phase-out — it simply stopped.

Properties acquired before 27 March 2021 phased out gradually:

Period	Deductible
To 30 September 2021	100%
1 October 2021 – 31 March 2023	75%
1 April 2023 – 31 March 2024	50%

 

New builds stayed exempt from this restriction throughout, under a separate rule covered below.

The Phase Back In (2024–2025)

Following the 2023 election, the incoming government reversed course. Instead of continuing the phase-out toward 0%, deductibility phased back in:

Period	Deductible
1 April 2024 – 31 March 2025	80%
From 1 April 2025	100%

This restoration applied to every landlord — not just those on the gradual phase-out schedule. Take a property acquired in June 2021. It had faced 0% deductibility since October that year. It jumped straight to 80% on 1 April 2024, then 100% a year later, exactly like every other rental property. The interest limitation rules were formally repealed(opens in new tab) once full deductibility took effect.

Where Things Stand Now

From 1 April 2025, interest on money borrowed for residential rental property is fully deductible. That applies to every landlord, regardless of acquisition date or when the loan was drawn down. The ordinary deductibility tests still apply. Interest has to relate to earning rental income. It can’t cover private use.

That last point matters more than it sounds. Say you drew down a loan before 27 March 2021, and used part of it for something other than the rental property. You still need to trace that split accurately. The interest limitation rules only ever applied to the residential-property portion of a loan. Getting that apportionment wrong remains a common error.

New Builds: The Exemption That Ran Throughout

Anyone who developed a property to add a self-contained dwelling, or acquired a qualifying new build, kept full interest deductibility the whole way through the limitation period. No phase-out, no gap. A “new build” for this purpose generally means a property with its Code Compliance Certificate issued on or after 27 March 2020.

Full deductibility now applies to every residential rental property regardless of build status. So this exemption has lost most of its practical significance going forward. It still matters if you’re reviewing historical returns from 2021 to 2025, though — a new build owner should never have seen a reduced deduction during that window.

What Happened to the Interest You Couldn’t Claim?

Interest denied during the limitation years doesn’t necessarily just disappear. Say you later sell the property, and that sale is taxable — under the bright-line test or another land-sale provision. The previously denied interest can then reduce your taxable gain, or add to your cost base, depending on the specific provision involved. This is one of the most commonly missed details for investors who held property through the 2021–2025 limitation period. Raise it with your accountant specifically if you’re planning a sale.

Interest Deductibility and Ownership Structures

Interest deductibility applies at the level of whoever holds the debt and earns the rental income — an LTC, a company, a trust, or an individual. Weighing up selling a property into an LTC to restructure debt? Full deductibility now applies to that new lending exactly as it would for personally-held debt. That’s made restructures of this kind considerably more attractive than during the limitation years.

The residential property deduction (ring-fencing) rules(opens in new tab) still apply on top of interest deductibility. A fully deductible interest bill can still push a property into a ring-fenced loss, if total deductions exceed rental income for the year. That loss then carries forward, rather than offsetting your other income immediately.

Common Mistakes

Assuming a post-2021 purchase still can’t claim interest. True from 2021 to early 2024, but not since 1 April 2025. Some investors — and even some general accountants who don’t work in this space daily — still apply the old restriction out of habit.

Not tracing revolving credit or offset facilities correctly. Investors using these products need clear records showing which portion of the drawn balance relates to the rental, especially where a loan covers both business and residential property. Full deductibility doesn’t remove this tracing requirement.

Missing the taxable-gain adjustment on sale. Investors who held property through the limitation years, and paid tax on a bright-line sale afterward, sometimes miss the chance to factor in previously denied interest.

Getting non-standard balance dates wrong. The 80% and 100% dates apply from 1 April regardless of your actual balance date. A December or June balance date taxpayer needs to apportion interest within a single income year, rather than applying one flat percentage to the whole year.

Worked Examples

Sarah bought her rental in 2019 and held it through the whole transition. Priya’s mortgage interest was 100% deductible before October 2021. It then dropped to 75%, then 50%, before climbing back to 80% for the 2024–25 year and 100% from 1 April 2025. Her accountant apportions her 2024–25 return to reflect the exact 80% rate applying from 1 April 2024. Her balance date is 31 March, so the whole year falls under the same percentage.

Adrian buys a rental in August 2026, well after the rules settled. Daniel takes out a new mortgage to fund the purchase. Full deductibility now applies to every landlord regardless of acquisition date. So Daniel claims 100% of his interest from his very first return. He never has to think about the phase-out schedule that applied to earlier buyers at all.

Checklist for Your Return

• ✅ Confirm your interest deduction reflects 100% for any period from 1 April 2025 onward
• ✅ Check earlier years against the correct phase-out or phase-back percentage for that specific period
• ✅ Trace any revolving credit or mixed-use loan to confirm exactly what portion relates to the rental property
• ✅ If you sold a property that was subject to bright-line tax, check whether previously denied interest reduces your taxable gain
• ✅ Confirm your new-build status if you’re reviewing historical returns from 2021–2025
• ✅ Apportion correctly if your balance date isn’t 31 March

Common Questions

Is interest on my rental mortgage fully deductible right now? Yes, from 1 April 2025 onward, for every residential rental property regardless of when you bought it.

I bought my property in 2022 — does that affect my current deduction? No. The restoration to 100% applies regardless of acquisition date. Only your historical returns for 2021 through early 2025 need the phase-out or phase-back percentage applied.

Can I go back and claim interest I missed during the limitation years? Generally no, for the years the limitation applied. But check whether a later sale lets you factor in previously denied interest against your taxable gain.

Does this apply to short-stay accommodation like Airbnb? Generally yes, if the property earns rental income, subject to the same private-use tests as any other rental.

Summary

Interest deductibility NZ rental property owners once lost almost entirely is now fully restored. From 1 April 2025, every landlord claims 100% of their interest, regardless of when they bought their property or drew down their loan. That wasn’t always the case. Deductibility dropped as low as 0% for some properties during 2021 to 2024, before phasing back in through 50% and 80%. New builds kept full deductibility throughout. Held property through that limitation period? Check your historical returns match the correct percentage for each period. And remember: previously denied interest can sometimes still help you on a later, taxable sale.

Talk to EpsomTax.com About Your Interest Deductions

Getting the history right matters just as much as getting today’s rate right. A missed apportionment in an earlier year, or an overlooked adjustment on sale, can leave real money on the table.

Contact EpsomTax.com to review your interest deductions, past and present. We work with New Zealand property investors every day, and we can confirm you’re claiming exactly what you’re entitled to — for this year, and any year still open for amendment.