New rules limiting the ability to deduct loan interest from rental income have now been passed into law.
What this means for residential rental property owners
Backdated to apply from 1 October 2021 for:
- Residential rental property purchased on or after 27 March 2021, interest cannot be claimed as an expense from 1 October 2021, unless an exclusion or exemption applies.
- For property acquired before 27 March 2021, the ability to deduct interest on existing loans is being phased out over 4 years, ending 31 March 2025 (see the table below).
- Interest deductions for any new loans drawn down on or after 27 March 2021 is not allowed from 1 October 2021 onwards.
Phasing out interest deductions
|Income year||Percentage of interest you can claim|
|1 April 2020 - 31 March 2021||
|1 April 2021 - 30 September 2021||
|1 October 2021 - 31 March 2022||
|1 April 2022 - 31 March 2023||
|1 April 2023 - 31 March 2024||
|1 April 2024 - 31 March 2025||
|1 April 2025 onwards||
Exemptions and exclusions
Some types of residential accommodation will be excluded from the interest limitation rules, such as:
- the main home (if used to earn income)
- business premises
- various accommodation providers.
There are exemptions for land businesses, residential developments and new builds.
Changes to tax returns
From the 2022 income tax year onwards, you will need to take the new interest limitation rules into consideration when completing your income tax return.
Returns will include new fields to capture information about residential rental property interest expenses, including:
- total interest,
- interest expense claimed, and
- reasons for claiming interest expenses.
Where can I find more information about these changes?
More information, guides and calculators are now available to help you work out if and how the new rules apply to you, and guide you through filing your return.
You can also watch this YouTube video on Interest limitation rules for residential rental property owners.