For decades, NZ landlords deducted their mortgage interest from rental income before calculating tax. Labour removed this in 2021. National is bringing it back, but gradually, over three years.
The phase-in schedule:
- 2023-24: 50% of interest deductible (Labour's partial restoration)
- 2024-25: 80% of interest deductible
- 2025-26: 100% of interest deductible (full restoration)
For a landlord paying $30,000/year in mortgage interest on a rental property with $45,000 in gross rental income:
- At 0% deductibility: taxable income = $45,000 → tax at 33% = $14,850
- At 100% deductibility: taxable income = $15,000 → tax at 33% = $4,950
- Difference: $9,900/year in tax savings
Why it matters for property investors
The removal of interest deductibility in 2021 made many highly-mortgaged rental properties cash-flow negative. Landlords with high LVR mortgages suddenly faced tax bills on "income" that was entirely consumed by interest payments. Some sold. Some raised rents. The restoration reverses that pressure.
The new-build exemption (continuing)
New-build properties (Code of Compliance Certificate issued after March 27, 2020) retained full interest deductibility throughout the removal period. This created a market distortion favoring new construction, which was the policy intent (increase housing supply). The exemption continues but becomes less relevant as ALL properties regain deductibility by 2025-26.
The Bright-Line interaction
If you sell a rental property within the bright-line period (currently 2 years), any capital gain is taxable. Interest deductibility during the holding period is allowed against rental income but does NOT reduce the bright-line capital gains tax.
