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Funds borrowed before 27 March 2021

For properties acquired before 27 March 2021, the ability to deduct interest is being phased out between 1 October 2021 and 31 March 2025.

Phasing out interest deductions

Date interest incurred Percentage of the interest that can be claimed
 1 April 2020 to 31 March 2021 100%
 1 April 2021 to 30 September 2021 100% 
 1 October 2021 to 31 March 2022 75% 
 1 April 2022 to 31 March 2023 75% 
 1 April 2023 to 31 March 2024 50% 
 1 April 2024 to 31 March 2025 25% 
 1 April 2025 onwards 0% 

Funds borrowed on or after 27 March 2021

If you borrowed funds on or after 27 March 2021 for your property, interest deductions cannot be claimed from 1 October 2021. The exception is if you used those funds for a property acquired:

  • before 27 March 2021 (for example, you entered into an agreement, but settlement was in May 2021), or
  • as a result of an offer you made on or before 23 March 2021 that could not have been withdrawn before 27 March 2021 (for example, as part of the contractual terms and conditions in a tender process).

If either of these situations apply, your ability to deduct interest can be phased out according to the table above. If an exclusion or exemption applies, your interest deductions will not be limited under the interest limitation rules. 

Exemptions for property development and new builds

How properties are affected by the interest limitation rules

Use this calculator for each loan to help you work out how much interest is deductible.

Property interest phasing calculator

Refinancing on or after 27 March 2021

Refinancing up to the level of the original loan does not affect the deductibility of your interest. If the original loan qualified for phasing out, then that treatment remains the same.

Loans in a foreign currency

If your rental property is financed by a loan in foreign currency, any interest is non-deductible from 1 October 2021. However, if you refinance the loan with a New Zealand dollar loan, the new loan qualifies for phasing out for the period from when the New Zealand dollar loan is drawn down.

Variable loans - revolving credit or overdraft

If you have a variable balance loan for your residential rental property, you need to trace each individual withdrawal and deposit to that loan account to work out the amount of deductible interest. The calculation may be time consuming. To simplify the calculation, you may use the 'high water mark' method to work out how much interest is deductible.

Under the high water mark method, if your loan is solely used to finance the residential rental property, then any interest incurred will be deductible subject to phasing out if the loan balance remains at or below the loan balance as at 26 March 2021. 

However, if the loan is used to finance a mixture of taxable and private activities, then you can calculate the amount of interest based on the lower of:

  • the affected loan balance – this is the amount of the actual loan balance at any particular time that applies to the residential rental property (for example, exclude funds used to finance private expenditure)
  • the initial loan balance – this is the loan balance on 26 March 2021. 

If the affected loan balance is lower than the initial loan balance, all interest incurred will be deductible after applying the phasing percentage for the year.

If the affected loan balance is higher than the initial loan balance, only the interest incurred up to the initial loan balance is deductible after applying the phasing out percentage for the year. The amount of interest incurred above the initial loan balance is not deductible after 1 October 2021. 

Tracing loans used for both residential property and non residential property purposes

The interest limitation rules do not affect borrowings for non-residential property purposes. For example, if you borrow against a residential property to buy a truck for a transport business, your interest deductions are not affected.

If you have a loan drawn down before 27 March 2021 and used that loan for residential property and non-residential property purposes, you need to trace the loan and determine how much of the loan was used for residential property. 

Interest incurred on the portion of the loan used for residential property will be subject to phasing (that is interest deductibility will be denied on a staggered basis increasing between 1 October 2021 and 31 March 2025). 

The deductibility of the interest incurred on the non-residential property portion of the loan is determined under the other deduction rules.     

Untraceable loans

If it is not possible to reasonably determine how much of the loan was used for the residential property, a special transition rule applies (ending 31 March 2025). 

Under the transition rule, the loan can be treated as being used to acquire your other business property first (based on the market value of that business property) and then the balance is applied to the residential property.

If the balance of an untraceable loan on 26 March 2021:

  • is less than the value of other income generating property held, none of the interest on the loan is subject to limitation under the interest limitation rules
  • exceeds the value of other income generating property held, the excess is treated as having been used to acquire the residential property. The interest is subject to the limitation rules and  subject to phasing (that is interest deductibility will be denied on a staggered basis between 1 October 2021 and 31 March 2025).

When a repayment is made reducing the balance of a single loan used for both purposes, the general rule is repayments are treated as being applied to the loan used for residential property first until the balance reaches zero. Unless the non-residential property that was held on 26 March 2021 is sold and the sale proceeds are used to repay the loan.


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Last updated: 17 Mar 2022
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