Rental Properties – Interest Deductibility Rules

The initial effects of Government’s proposal in March 2021 to remove the ability to deduct mortgage interest on rental properties will be felt by taxpayers with residential rental properties in their 2021-22 income tax year. Property rented out some of the time, including holiday homes, will also be affected by the rule change. This is likely to result in higher income tax payments for taxpayers owning residential rental properties.

The interest deductibility rules means that Interest deductions on residential property acquired on or after 27 March 2021 will not be allowed from 1 October 2021. Interest on loans for properties acquired before 27 March 2021 can still be claimed as an expense, but the interest deductions will be phased out over a four-year period between 1 October 2021 and 31 March 2025.

The phase-out period means that in the following income years landlords can make these interest deduction claims:

• 1 October 2021 to 31 March 2022 – 75%
• 1 April 2022 to 31 March 2023 – 75%
• 1 April 2023 to 31 March 2024 – 50%
• 1 April 2024 to 31 March 2025 – 25%
• 1 April 2025 onwards – 0%

If money is borrowed on or after 27 March 2021, to maintain or improve property, rather than subject to the phase-out rule, the interest on those newly borrowed funds will not be able to be claimed as a deduction from 1 October 2021.

An exclusion will apply for ‘new-builds’.  This includes purpose-built rentals and social housing as the Government hopes that this will stimulate investment in new housing. Purpose-built rentals are large residential developments designed for ongoing rental, rather than sale.

For any new-build, a property that received its code compliance certificate on or after 27 March 2020 will be eligible to deduct interest for up to 20 years from the time the property’s code compliance certificate is issued. The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20-year period.

Property developers should not be affected by these changes and will still be able to claim interest as an expense.

Interest deductions will continue be available in full for the following types of property:

• A portion of the main home if it is used to earn income (for example, from flatmates or boarders).
• Properties used as business premises (except for an accommodation business), like offices and shops. This includes residential properties to the extent they are used as business premises (for example, a house converted into a doctor’s surgery).
• Hospitals, hospices, nursing homes, and convalescent homes.
• Retirement villages and rest homes.
• Hotels, motels, hostels, inns, campgrounds.
• Houses on farmland.
• Bed and breakfasts where the owner lives on the property.
• Employee accommodation.
• Student accommodation.
• Land outside New Zealand.
• Māori collectively owned land and housing.
• Emergency, transitional, social, and council housing.

The change to the interest deductibility rules will be a concern for many landlords as it increases the amount of tax owed each year and investors will need to pay for the interest costs incurred out of income that they have already paid tax on. An unintended consequence may be that existing landlords increase rents to cover the increased costs of ownership for the lost interest claim.

If you are uncertain of how this policy change may affect you or you have any questions on this or other tax matters, please contact us. Our team is here to provide any assistance you may need.