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Interest Deductibility Changes on Rentals and 6 ways to manage the change


Currently when owners of residential investment property calculate their taxable income they can deduct the interest on loans that relate to the income from those properties (claimed as an expense). This reduces the tax they need to pay.

The Proposed Change

The Interest deduction, which reduces taxable income, will be phased out so that from 1 April 2025, there will be no deduction for current rentals. 

For rental properties purchased after 27 March 2021 or additional borrowings, there will be no deduction from 1 October 2021.

It is still a proposal with more details and refinements before this will become law.

What will this cost?

The tax to pay depends on how much interest there is and your current level of taxable income, but an example below shows the cost of a $100,000 loan, assuming you earn more than $70,000 in taxable income and less than $180,000.

The table below shows the reduction in the interest deductibility from 87.5% in the 2021/22 year down to 0% in the 2025/25 year. The table is based on a rental owned before 27 March 2021.

When this fully impacts the income tax cost per $100,000 of lending will be;

  • $800 per year at a 2.3% interest rate
  • $2,300 per year at a 7% interest rate

How can you mitigate this

  1. Reduce the rental loans as quickly as you can. If you are paying less interest, then paying the extra tax is easier to manage.
  2. Change to commercial property investing, interest is tax-deductible for commercial properties
  3. Borrow more against your rental property and invest in a PIE investment, the interest on investment loans would be tax deductible but the income doesn't need to be declared as it is tax paid.
  4. You could start increasing the rent tenants are charged. This will depend on the market and what other landlords do.
  5. Start getting used to paying this extra tax by putting away the extra amount on the mortgage now so you are used to the payments
  6. Weigh up if the tax paid is more than the capital gain if it is not worth it then perhaps sell the Rental property and invest in something else

This isn't financial advice, you should dicuss any investing decisions with a suitably qualified Financial Advisor.

IRD Factsheet

The IRD have distributed a factsheet which gives some detail and examples, click the link below to access this file.