Interest limitation on residential investment property

The Government has introduced legislation to limit interest deductibility for residential property investments. From 1 October 2021:

• for properties acquired before 27 March 2021, interest deductions on loans will be phased out at 25% per year over 4 years, until 31 March 2025
• for properties acquired after 27 March 2021, interest deductions will not be deductible (unless the property was acquired by an offer made on or before 23 March 2021 that could not be withdrawn before 27 March 2021)

The focus is on residential investment properties which can be used for long term accommodation. Typically, this would mean a house or an apartment, whether it is used for providing short-term or long-term accommodation, or even left vacant. It leaves out:

• the main family home
• new build properties, which are exempt from the interest limitation rules
• property developers, who can continue to deduct interest expenses
• several types of residential property, including farmland, certain Māori land, student, employee, and rest home accommodation
• hotels, and other businesses set up to provide short-term rather than long-term accommodation
• owner-occupiers who rent to flatmates

The rules also allow for interest deductions on a taxable sale of residential property, although deductions may be limited to the gain on sale.

These rules became law with the introduction of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act, which contained the interest deductibility changes and the extension of the bright line test, receiving Royal Assent on 30 March 2022.

From the 2022 income tax year, your income tax return will include new fields to capture information about residential property interest expenses, including total interest and interest expense claimed.

Talk to us about how the changes affect you.

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