Earlier this year, the National government announced a significant policy change that would reverse the previous government’s interest deductibility rules by April 2025. This change is likely to have a substantial impact on property investors in New Zealand, providing a more favourable tax environment and potentially making property investment more attractive. Here’s a closer look at the updated rules, how they work, and what you need to know to make the most of these changes.

If you own a rental property with a mortgage, you can deduct the interest you pay on that mortgage from the income you receive from rent when calculating your taxable income.

In 2021, the Labour government put rules into place that meant:

• You could no longer claim a deduction for interest on your rental property if you purchased it on or after 27 March 2021.
• Your ability to claim interest deduction for rental property purchased before 27 March 2021 was being phased out.
• There were some exceptions to this such as if the property was a new build.

Under the revised rules, you can now claim interest as an expense for any residential investment property you own, regardless of when the property was bought or when the loan was drawn down.

The changes are happening in two phases:

• From 1 April 2024, you can claim a deduction for 80% of the interest on funds borrowed for the residential property
• From 1 April 2025, you’ll be able to claim 100% of the interest deduction instead of 80%.

Under the previous government’s rules, new builds had a tax advantage with full deductibility. The new rules level the playing field, removing this advantage.

Impact on borrowing Power and mortgage

The return of full interest deductibility is a significant win for property investors. Not only does it reduce your overall tax burden, but it also makes property investment more financially viable, especially in a market where profit margins can be tight.

The tax savings from interest deductibility could potentially increase your borrowing power, allowing you to invest in additional properties or undertake more significant renovations. Or you could use the tax savings to pay down your mortgage faster and save significantly on interest charges over the life of your loan.

A unique opportunity

The easing of interest deductibility rules presents a unique opportunity for property investors to maximise their returns. To find out more about how these changes could benefit your investment strategy, contact a Mortgage Express branded mortgage adviser today.

Our expert mortgage advisers provide tailored financing options to help you make the most of the new interest deductibility rules to reach your property investment goals. Contact Mortgage Express now to discuss your next steps in property investment.