Any house, apartment, or other such building in New Zealand that a person could live in may be affected by the interest limitation rule. Bare land that could be used for residential property also is affected. It does not matter whether the property is rented out long-term, used for short-stay accommodation, or even left vacant.
You’ll still be able to deduct interest for some properties
Certain properties are unaffected by these rules. This means that if you satisfy the other requirements for claiming deductions, you are still able to deduct interest for these properties.
Main homes are not affected by these changes. You generally can’t claim interest deductions for private use, but if you use your main home to earn income (such as from a flatmate or boarder), you are able to deduct some interest against that income.
For interest to be deductible, it must satisfy the general deductibility rules. In a flatmate situation, to determine the amount that is deductible, this means apportioning expenses between:
- shared areas
- areas exclusively used by the flatmate
- areas exclusively used by the homeowner.
Provided you meet the other requirements for claiming deductions, you can deduct interest against income from these unaffected properties:
- Main home – the interest limitation does not apply to interest related to any income-earning use of an owner-occupier’s main home, such as flatmates, boarders, bed and breakfast where the owner lives on the property
- Properties used as business premises (except for an accommodation business), like offices and shops. This includes residential properties to the extent they are used as business premises (for example, a house converted into a doctor’s surgery).
- Certain Māori land, papakāinga and kaumātua housing, and land transferred as part of a settlement under te Tiriti o Waitangi/Treaty of Waitangi
- Emergency, transitional, social, and council housing
- Commercial accommodation such as hotels, motels, and hostels (but not short-stay accommodation provided in a residential dwelling)
- Boarding establishment
- Care facilities: hospitals, nursing homes, hospices, and convalescent homes
- Retirement villages and rest homes
- Employee accommodation
- Student accommodation.
A boarding establishment is a property with:
- a minimum of 10 boarding rooms that are not self-contained
- communal living facilities, including shared kitchens and living areas available to all residents
- servicing and management taken care of by the business.
Employee accommodation is defined as property a person provides to their employees or other workers for accommodation in connection with their employment or service. The definition also includes property provided by a company in the same wholly-owned group as the person to the person’s employees or other workers. However, it does not include accommodation provided to employees or other workers who are associated with the person, unless it is necessary for the person to provide the accommodation because of the nature or remoteness of their business.
Certain student accommodation would be excepted from the interest limitation rules. This includes:
- a boarding establishment used for the accommodation of students enrolled at a registered school or premises described in section 5B of the Residential Tenancies Act 1986, and
- premises described in section 5B of the Residential Tenancies Act 1986 even if they are used mainly, and not exclusively, for the accommodation of students.
This does not include a landlord who leases their residential rental property to students privately.
Māori collectively-owned land and housing
- Māori customary land, Māori freehold land, Crown land reserved for Māori, and land set aside as a Māori reservation.
- Housing on land owned directly or indirectly by a Māori authority (or an entity which is eligible to be a Māori authority) that is provided as a residence to its shareholders or beneficiaries.(for example, papakāinga or kaumātua housing).
- Land owned directly or indirectly by a Māori authority (or entity eligible to be one) under a Treaty of Waitangi settlement or a post-Treaty settlement mechanism (for example, through a right of first refusal). This includes where land is transferred to an entity owned by the claimant, or where a ground lease is held by an entity owned by the claimant.
Emergency, transitional and social housing
If your property’s sole purpose is for emergency, transitional, social and council housing and is leased to a government department (for example, the Ministry of Housing and Urban Development or Kāinga Ora) or to a registered community housing provider or a council controlled organisation, then you can still claim interest deductions.
This also covers connected or related services provided in the same building or in a different building on the same land. The whole property needs to be leased to the housing provider in order to qualify (for example, 1 bedroom in a 5-bedroom house would not qualify for this exemption).
A full list of eligible government departments can be found in schedule 2, part 1 of the Public Service Act 2020:
The Community Housing Regulatory Authority maintains a register of community housing providers registered under the Public and Community Housing Management Act 1992:
If your property is used by a local authority or a council-controlled organisation (CCO) for the sole purpose of providing housing to people assessed by a local authority as being eligible for housing at less than market rent, it is not subject to the interest limitation rules.
This still applies if connected or wraparound services are provided on site either in the same building or in a different building on the same land (for example, rehabilitation). The whole property needs to be leased to the local authority or CCO in order to qualify (for example, 1-bedroom in a 5-bedroom house would not qualify for this exemption).
Interest incurred on a property is subject to interest limitation if it is not used for council housing, for example, if the CCO provides rental housing at market rates.
What if part of my property is affected and part is excluded?
Tāmati owns a 2-storey building with mixed residential and commercial use. The ground floor is a clothing store and the upper storey is rented out as long-term residential accommodation. The whole building is on a single legal title.
Tāmati has 1 loan for the whole property. The upper-storey apartment is a residential property, but the clothing store on the ground floor is excluded. Following standard principles for apportionment, Tāmati calculates that the clothing store on the ground floor accounts for 55%, and the upper storey for 45%, of the interest paid on his loan.
Therefore, Tāmati would be subject to interest limitation for 45% of his interest expense, as this would be interest that relates to affected property. For the period from 1 October 2021 to 31 March 2025, a portion of the 45% would not be deductible.