Rental Interest Deductibility: The Current Rules
🏠 Interest is fully deductible again
Between 2021 and 2025 the rules for claiming interest on a residential rental property went through the biggest change in a generation, and then reversed. Interest on money borrowed for a residential rental was progressively removed as a deduction from 1 October 2021, then restored in two steps: 80% became deductible from 1 April 2024, and 100% became deductible again from 1 April 2025. For the 2026/27 tax year, which runs from 1 April 2026 to 31 March 2027, you are back to the position most landlords always assumed applied: the interest you incur on money genuinely borrowed to buy or improve a residential rental is fully deductible against your rental income. This guide explains the current 100% rule and how you got here, how deductibility sits alongside the residential rental loss ring-fencing rules, what interest actually counts as deductible, and the records you need to keep. It is written for the current rules, not the phase-out that has now ended.
How the rules changed, step by step
The interest limitation rules were introduced to slow investor demand for existing housing. For loans that were already in place before 27 March 2021, the deduction was phased down in stages. For property acquired on or after 27 March 2021 with new borrowing, interest was generally denied altogether during the phase-out unless an exemption such as a new build applied. The government then decided to bring the deduction back, and did so faster than first signalled. The table below shows the deductible percentage for existing residential rental loans through the change.
| Period | Deductible portion (existing loans) |
|---|---|
| 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 | 80% |
| From 1 April 2025 (current) | 100% |
Interest that was denied during the phase-out stays denied. You cannot go back and reassess earlier years to claim the portion you lost then. The restoration applies from the dates above onwards, so it changes your current and future returns, not your history.
How this guide differs from the rental income guide
Our tax on rental income guide is the broad, start-here explainer for everything about declaring rental income, choosing between the actual-cost and standard-cost methods, and filing your return. This guide is narrower and deeper: it is only about the interest-deductibility rules and how they interact with loss ring-fencing. If you are new to rental tax, read the broad guide first, then come back here for the detail on interest.
A deduction reduces the profit you are taxed on. It does not hand you money. If your rental makes a loss, the deduction still cannot be used against your salary, because of the ring-fencing rules covered in section 3. Fully deductible interest is valuable, but only against rental income.
What the rules apply to
The interest rules apply to residential land, which means any property with a dwelling on it such as a house, unit or apartment, and bare land that can be used to build residential housing. It does not matter whether you rent the property out long-term, use it for short-stay accommodation, or leave it empty. Commercial property, farmland and your own main home used privately sit outside these rules.
📊 What interest you can and cannot claim
Now that the percentage is back to 100%, the real question for most landlords is not how much of the interest is deductible, but which interest counts at all. The answer turns on one idea: the use of the borrowed money. Interest is deductible when the money it relates to was borrowed to earn taxable income, in this case to buy, build or improve a residential rental. Interest is not deductible on money borrowed for private purposes, even when the loan is secured against the rental.
Interest that is usually deductible
- Interest on the loan you took out to buy the rental property
- Interest on money borrowed to make capital improvements to the rental, such as a new deck or an extra bedroom
- Interest on borrowing for genuine repairs and maintenance on the rental
- Interest on money borrowed to pay deductible rental running costs
Interest that is not deductible
- Interest on money drawn from the loan for private spending, such as a car, a holiday or paying down your own home loan
- Interest on borrowing to buy a property you use privately rather than rent out
- The private share of interest where a property is used partly for private purposes
- Penalty or default interest that relates to private, not rental, borrowing
People often assume that because a loan is registered against the rental, all of its interest must be deductible. That is not how it works. If you top up the rental loan by $30,000 to buy a boat, the interest on that $30,000 is private and not deductible, no matter which property secures it. Trace every dollar you borrow to what it actually paid for.
Mixed-use and topped-up loans
Where one loan has been used partly for the rental and partly for private spending, you split the interest in proportion to how the money was used. Keep the rental borrowing and private borrowing as separate as you can, ideally on separate loan accounts, so the split is clean and easy to prove. If you refinance, the deductibility follows the original use of the funds, not the new loan paperwork.
Owning through a company or trust
The interest rules apply to the property, not just to individuals, so they reach through most structures including companies, trusts, partnerships and look-through companies that hold residential rental land. Owning through an entity does not create a way around the rules. It can change who files and how losses are used, so if you hold rental property in a structure, take specific advice on your situation.
Record-keeping
You must keep records that let you work out and support every deduction you claim, and Inland Revenue expects you to hold them for at least seven years. For interest, that means being able to show what each loan was drawn down for. Useful records include:
- Loan statements showing interest charged for the year
- The purpose of each drawdown or top-up, especially any private use
- Invoices for repairs, improvements and running costs the borrowing funded
- Bank records that trace borrowed money to what it bought
The single most common interest error is a rental loan that has quietly funded private spending over the years, with no record of the split. If you cannot show what the money was used for, you risk losing the deduction on the whole loan. A separate loan account for anything private keeps your rental interest clean.
🔒 Ring-fencing and new builds
Full interest deductibility does not mean a rental loss can be used freely. Since the 2019/20 tax year, residential rental losses have been ring-fenced. That word means the loss is fenced in: it can only be used against residential rental income, not against your salary, wages, business profit or other income. This is the rule that most often surprises landlords who expected a loss-making rental to cut their PAYE bill.
How ring-fencing works
Add up your rental income for the year, then subtract your allowed deductions including your fully deductible interest. If the result is a profit, you pay tax on it at your marginal rate. If the result is a loss, you cannot offset that loss against your other income this year. Instead the excess deductions are carried forward and can be used in a future year when the same rental portfolio makes a profit, reducing the tax on that later income.
Carrying losses forward
Carried-forward losses do not expire while you still hold residential rental property. They sit on your record and are automatically applied in the first year your rental makes a profit, and any surplus keeps carrying forward. In narrow situations, for example when you sell all the properties in a portfolio and every sale is taxed, unused losses can finally be released against other income, but for most landlords the practical rule is simple: a rental loss only ever helps against rental income.
Restoring 100% interest deductibility makes it easier for a geared rental to run at a loss, because the full interest bill now counts. Ring-fencing then decides what that loss can do. So the two rules pull in opposite directions: one increases your deductions, the other limits where the resulting loss can be used.
New builds had their own treatment
New builds were treated more generously than existing homes throughout the phase-out. A qualifying new build was exempt from the interest limitation rules, so investors in new housing could keep claiming interest during the years that existing-home investors were losing it. Now that deductibility has returned to 100% for all residential rental property, the day-to-day gap between a new build and an existing home for interest purposes has closed. New builds still carry other advantages elsewhere in the tax rules, most notably a shorter bright-line period, which our bright-line test guide explains.
Where interest fits in your wider rental tax
Interest is usually the largest single deduction a leveraged landlord claims, so getting it right has a big effect on your taxable profit. But it is one line among several. Rates, insurance, property management fees, repairs and maintenance, and accounting costs are all deductible too, while the cost of buying the property and capital improvements are not deductible as expenses. For the full picture of what you can and cannot claim, and how to file, use the broad tax on rental income guide.
🔢 Worked Examples
These four New Zealand examples use the current 2026/27 rules, with hand-checked figures. Interest rates and rents are illustrative, but the tax treatment is real.
Situation: Priya owns one rental in Hamilton. It is let at $650 a week, so $33,800 a year. Her mortgage is $350,000 at 6.5%, giving $22,750 of interest for the year, all of which is deductible under the current 100% rule. Priya's other income puts her on the 33% marginal rate.
Situation: The Chens bought a rental in Auckland with a large mortgage. It is let at $480 a week ($24,960 a year), but the $520,000 loan at 6.5% costs $33,800 in interest. Together they earn $95,000 in salaries and hoped the rental loss would cut that tax bill.
The $18,136.80 loss is ring-fenced. It does not reduce the tax on the Chens' $95,000 of salary at all. Instead it is carried forward. If their rental makes a $5,000 profit next year, the carried-forward loss wipes that out, they pay no rental tax, and $13,136.80 keeps carrying forward. Full interest deductibility made the loss bigger, but ring-fencing still decides what the loss can do.
Situation: Sione has a rental with a $300,000 loan at 6.5%, which is $19,500 of interest a year. He tops the loan up by $40,000 to buy a family car, taking the balance to $340,000 and the total interest to $22,100. He assumes all of it is deductible because the loan is against the rental.
The $2,600 of interest that relates to the car is private spending and cannot be claimed, even though the whole loan is secured against the rental. If Sione had put the car on a separate personal loan, the split would be obvious and his rental interest would stay clean. Because the two are mixed, he has to track the proportion every year.
Situation: Margaret has held a rental since 2019 with a $400,000 loan at 6%, a steady $24,000 of interest a year. The rental brings in $600 a week ($31,200 a year) and has $6,000 of other deductible costs. Watch how her taxable profit falls as interest deductibility is restored, holding everything else the same. She is on the 33% rate.
| Tax year | Interest deductible | Total deductions | Taxable profit | Tax at 33% |
|---|---|---|---|---|
| 2023/24 (50%) | $12,000 | $18,000 | $13,200 | $4,356 |
| 2024/25 (80%) | $19,200 | $25,200 | $6,000 | $1,980 |
| 2026/27 (100%) | $24,000 | $30,000 | $1,200 | $396 |
Related tools and guides
- Tax on rental income guide: the broad start-here explainer for declaring rental income and filing
- Bright-line test guide: when selling a rental is taxable
- Rental yield and investment guide: measuring the return on a rental
- Rental yield and investment calculator: work out gross and net yield
- Bright-line test calculator: check whether a sale falls inside the bright-line period
Sources: Verified against Inland Revenue (ird.govt.nz): Residential property interest limitation rules (ird.govt.nz/property-interest-rules); How interest deductions are affected; Residential rental property deductions and ring-fencing; and Rental property expenses. Standard IRD record-keeping requirement of seven years. Figures current for the 2026/27 tax year as at 24 July 2026.
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