Interest Deductibility on Rental Property in 2025-26: What Landlords Can Claim

Interest deductibility for residential rental properties in New Zealand has gone through significant changes since 2021. After a period in which interest was progressively denied as a deductible expense, the rules have shifted again — and for the 2025-26 tax year, landlords are in a more favourable position. This article explains the current rules, the distinction between new builds and existing properties, and how the phase-back-in timeline affects what you can claim.

Background: The 2021 Rule Change and Its Reversal

In March 2021, the New Zealand government announced that interest on debt used to acquire residential investment properties would be phased out as a deductible expense. From 1 October 2021, deductibility was reduced in stages:

• 2021-22: 100% deductible for existing property
• 2022-23: 75% deductible
• 2023-24: 50% deductible
• 2024-25: 25% deductible
• From 1 April 2025: 0% deductible (under the original plan)

However, the incoming National-led government reversed this policy. The restoration of full interest deductibility has been progressively reintroduced:

• 2023-24 income year: 60% deductible (transition)
• 2024-25 income year: 80% deductible
• 2025-26 income year: 100% deductible (full restoration)

Interest Deductibility in 2025-26: Full Restoration

For the 2025-26 tax year (1 April 2025 – 31 March 2026), rental property interest is 100% deductible for both new builds and existing residential properties. This represents the completion of the phase-back-in timeline.

This means landlords can once again deduct the full amount of interest paid on mortgage debt used to fund residential rental properties, treating it as an ordinary business expense against rental income.

New Builds vs Existing Properties

During the phase-out and phase-in period, new builds were treated differently from existing (second-hand) properties. New builds retained 100% interest deductibility throughout the phase-out, providing an incentive to increase housing supply.

For 2025-26, both new builds and existing residential rental properties are on equal footing at 100% deductibility. The previous distinction no longer applies.

What Qualifies as a Deductible Interest Expense?

To claim interest as a deduction against rental income, you must be able to show a direct connection between the debt and the income-producing activity.

Qualifying interest

• Interest on a mortgage or loan used to purchase a residential rental property
• Interest on a loan used to improve or develop a rental property (e.g., a renovation funded by refinancing)
• Interest on top-up borrowing where the additional funds were used for the property

Non-qualifying interest

• Interest on personal debt (credit cards, personal loans unrelated to the property)
• Interest on debt used to fund personal expenditure
• Interest on debt that has been traced to a private purpose rather than income-earning purposes

The tracing rules apply: you must be able to demonstrate that the debt is connected to the income-producing asset. If you have a revolving credit mortgage that mixes personal and rental borrowing, you need to apportion the interest accordingly.

Other Deductible Expenses for Rental Properties

In addition to interest, the following expenses are generally deductible against residential rental income in 2025-26:

Capital improvements vs repairs

A critical distinction applies between repairs (deductible) and capital improvements (not immediately deductible). Replacing a broken window is a repair; adding a new bathroom is a capital improvement. Capital improvements are added to the cost base of the property and may affect the bright-line calculation on eventual sale.

Depreciation on Residential Buildings

New Zealand reinstated depreciation on commercial buildings in 2020, but residential buildings — specifically the building itself — remain non-depreciable. Landlords can only depreciate chattels (furniture, appliances, carpets, blinds) used in the rental property, not the building structure.

Chattels are depreciated at set IRD rates over their useful life. A new chattels schedule, prepared when you first rent out a property, helps establish the depreciable value of each item.

Brightline and Interest Deductibility Interaction

If you sell a residential property and the bright-line test applies (the property was sold within the bright-line period), any gain on sale is taxable as income. Interest claimed as a deduction during the period of ownership can affect the cost base calculation for bright-line purposes.

If interest was denied deductibility in an earlier year (for example, 2024-25 when only 80% was deductible), the denied portion may be treated as a deemed cost for bright-line purposes, reducing the taxable gain. IRD has published guidance on how this adjustment works in the transition years.

Mixed Use Properties

If you use a property partly as a rental and partly for private purposes (for example, a bach or holiday home that is sometimes rented out), different rules apply:

• Rental income from let periods is taxable
• Expenses must be apportioned between the let, private, and unoccupied periods
• The mixed-use asset rules (under subpart DG of the Income Tax Act) determine the apportionment formula
• Interest deductibility is also apportioned — not the full amount if the property has private use

Positive vs Negative Gearing

Restoring full interest deductibility in 2025-26 restored the deduction, not loss offsetting. A negatively geared landlord (interest costs exceed rental income) can now claim 100% of the interest against rental income — but if that produces a loss, the loss stays ring-fenced: it is carried forward against future rental income and cannot be set against salary, wages, or other income.

Ring-fencing of rental losses

Rental losses are ring-fenced: they can only be used to offset rental income from other properties, or carried forward to future years when the rental portfolio as a whole returns to profit. Rental losses cannot offset PAYE salary income in the way general business losses could in earlier decades.

This means that even with full interest deductibility, a landlord with a loss-making rental cannot use that loss to reduce their PAYE tax. The loss is preserved but can only be applied to future rental profits.

Record-Keeping for Rental Interest

IRD requires:

• Loan statements showing interest charged each year
• Evidence linking the loan to the rental property (mortgage documents, settlement statements)
• Bank statements for any mixed-purpose loans
• A record of apportionment if the loan partly covers personal and rental debt

You must keep these records for seven years after the relevant tax return is filed.

Summary

For the 2025-26 tax year:

• Rental property interest is 100% deductible — full restoration is complete
• This applies to both new builds and existing residential properties
• Other expenses such as rates, insurance, repairs, and property management fees remain fully deductible
• Residential buildings cannot be depreciated (only chattels)
• Rental losses remain ring-fenced — they cannot offset other income such as wages
• Keep clear records linking mortgage debt to the rental property

If you held a rental property through the 2021–2025 interest phase-out period, you may have denied interest deductions that could affect your bright-line calculations on eventual sale. A tax adviser can help you quantify this and ensure it is correctly reflected in any future return.