The Government today released the draft legislation outlining the details of the policy limiting interest deductions on residential property investments. These new rules have been designed to cool investor demand for existing houses in the NZ property market and to help boost supply by directing investment into new builds. These changes have not been welcomed by property investors, who lose the ability to offset the interest cost of a home loan against rental income received.

Furthermore, the Chartered Accountants Australia and New Zealand have raised concerns about the changes, which come in addition to the ring-fencing of tax losses and the mixed-use asset rules introduced recently for residential investment properties. The NZ tax leader John Cuthbertson FCA said “given that the policy rationale for both the interest deductibility position and the rules for the ring-fencing of rental losses are essentially the same, we recommend the ring-fencing rules should be repealed.” They have also requested a delay of the date for when the legislation comes into force, and an overall review of the land taxing rules in NZ.

An overview

As a result of the changes, all interest deductions have been disallowed on property acquired after 27 March 2021. For properties purchased before 27 March 2021, interest that is deductible against income from residential investment property will be phased out over the next 3.5 years.

In addition to the interest changes, the bright-line period for residential properties acquired on or after 27 March 2021 has been extended to 10 years. Consequently, from March 27 this year, if a residential property that is not the family (or main) home is sold within 10 years of its purchase, the vendor will be required to pay income tax on any profits on the sale.

Cash flow impacts

For new property acquisitions, it is now likely that rental income will exceed expenses. Also, for property investors with existing investments, these changes are expected to have a significant impact on taxable income and cash-flow.

To illustrate, here is an example showing the cash-flow impacts of the phased-out interest deductions on an investment property worth $750K with a home loan of $750K at 3% interest.

In short, for the average kiwi investor who has invested their savings, the cumulative $7.4K variance in cash-flow over 5 years will have a big impact.


Certain properties will be exempt from these rules due to their physical structure or purpose, such as the main home. Additionally, there are exemptions for property development and new builds as outlined below.

Exemption for new builds

Interest costs will still be allowable on new builds. Therefore, what is a new build?

  • A new build has been defined as a self-contained residence that receives a Code of Compliance Certificate (CCC) confirming the residence was added to the land on or after 27 March 2020. The definition also includes a self-contained residence purchased off plans that receives its CCC on or after 27 March 2020.
  • The definition of a new build includes modular and relocated homes
  • If an existing dwelling is converted into multiple new dwellings, this will qualify as a new build
  • Converting a commercial building into residential property will also classify.

This exemption applies from the dates the new build is acquired, or from when your new build receives its CCC. However, the exemption expires 20 years after it receives its CCC.

Furthermore, if a new build is acquired on or after 27 March 2021, a 5-year bright-line property rule will apply (instead of the 10-year rule). However, the new build must be purchased no later than 12 months after it receives its CCC. It must also have its CCC by the time it gets sold.

Exemption for business developing land

If land is held as part of a developing or land-dealing business, or a business of erecting buildings on land, interest deductions will still be allowed.

Exemption for other property development

If you are developing, subdividing or building on land to create a new build, you can deduct interest but only if existing rules allow you to. The exemption applies from the time you start the development and ends once the land is sold or a CCC is received.

Our thoughts

We believe that increasing the bright-line test to 10 years and supporting investment in the supply of new housing improves social equity. However, the new rules effectively introduce 3 complex land tax regimes by combining the denial of interest deductibility with the ring-fencing of tax losses for rental properties and the mixed-use asset rules. For some mum and dad investors who are doing their own taxes, this creates a non-compliance risk. Moreover, the bright-line exemptions on the family or main home contain some traps for the unwary. Homeowners should not assume that the main home exclusion will automatically apply to them, especially if they are away from their home for longer than a year. If this is the case, they will need to keep comprehensive records of capital improvements made and the number of days spent away from the property.

For more details see the Interest limitation information sheets

Published on 28 September 2021.