Mortgage Interest Deductibility NZ — What Every Landlord Needs to Know in 2025-26
1 April 2025
(ends 31 March)
always
Mortgage interest is usually the biggest expense a rental property investor in New Zealand has, and for a few years, NZ landlords couldn't claim it all back. The good news is that's changing. From 1 April 2025, mortgage interest is fully deductible again for most residential rentals. This guide explains exactly how the interest limitation rules worked, what changed, what you can claim on your rental property tax return, and how to make sure you're not paying more rental income tax than you should. You can also check the official IRD interest deductions page for the technical rules, or talk to our rental property tax team if you want us to handle it.
What Is Mortgage Interest Deductibility?
When you borrow money to buy a rental property and you pay interest to the bank every month. Inland Revenue Department (IRD) in New Zealand says that this interest is a legitimate business expense, like any business expense related to earning rental income, you can claim it as a tax deduction against your rental income. This is what's known as mortgage interest deductibility or rental property interest deduction.
This means the interest you pay reduces your taxable rental income, which lowers how much income tax you owe at the end of the year. For most NZ property investors and landlords, mortgage interest is by far the biggest deductible expense they have, often tens of thousands of dollars per year.
If you make $28,000 from your rental property and pay $22,000 in mortgage interest, for example, your taxable rental income drops significantly. If you have other rental property deductions, you might not have to pay much tax on your rental income or even have a net rental loss that you can carry forward under the ring-fencing rules.
The Full History — What Changed and When
In the past few years, New Zealand's rules about interest limits have changed a lot, which has left many residential property investors unsure of what they can and can't claim. Here's the full timeline so you know exactly where things are with your rental property tax return::
Before 27 March 2021 100% deductible
Landlords could get back all of the mortgage interest they paid on all of their rental homes. There were no restrictions. This was the standard rule for many years.
27 March 2021 — 31 March 2023 Phased out
Phased out As part of its housing policy, the last government put in place rules about how much interest could be charged. Interest deductibility was limited and then taken away completely for homes bought on or after March 27, 2021. Properties bought before that date were phased down slowly: 75% in 2022/23, 50% in 2023/24, and 25% in 2024/25. This hurt rental properties with negative gearing the most because many landlords suddenly couldn't claim their biggest expense.
2024/25 Tax Year 80% deductible
Starting on April 1, 2024, all rental homes can claim 80% of their mortgage interest, no matter when they bought the property. This was the first step toward getting full deductibility back.
From 1 April 2025 100% restored
From the start of the 2026 tax year, interest is fully deductible again for most qualifying residential rentals. This is the biggest positive change for NZ landlords in several years.
New Builds — All Years 100% always
New builds were exempt from the interest limitation rules throughout. Landlords with qualifying new builds have been able to claim 100% of their interest the entire time.
Current Deductibility Rates at a Glance
How Much Can You Actually Save?
To understand why claiming mortgage interest on your rental property matters so much, let's look at a real example. Say you have a residential rental property with a $500,000 mortgage at 6.5% interest per year, which is pretty typical for a NZ property investor right now.
💰 Interest Deductibility
Which Properties Qualify for Full Deductibility?
From 1 April 2025, the vast majority of NZ residential rental properties qualify for full 100% interest deductibility. This applies whether you own the property personally, through a Look-Through Company (LTC), a standard company or a family trust. But there are some situations where the residential property deduction rules work differently.
For the 2026 tax year onwards, full interest deductibility on investment property applies to:
| Property / Situation | 2025 Tax Year | From 1 April 2025 |
|---|---|---|
| Standard residential rental (any purchase date) | 80% | 100% ✓ |
| New build rental property | 100% ✓ | 100% ✓ |
| Property held in company or LTC | 80% | 100% ✓ |
| Property held in trust | 80% | 100% ✓ |
| Commercial property | 100% ✓ | 100% ✓ |
| Mixed use (part personal, part rental) | Proportional only | Proportional only |
Revolving Credit and Offset Loans — Important Warning
This is an area where a lot of rental property owners make mistakes without realising it. If your rental property mortgage is a revolving credit or offset loan, where the loan is linked to your personal bank accounts, the way interest is calculated can get complicated.
The basic rule is that interest on borrowings is only deductible if the loan was used to purchase or improve the rental property and generate rental income. If you've refinanced, topped up your loan, or used the same facility for personal spending, only the portion relating to the rental investment property can be claimed.
If you have a revolving credit or offset loan, the safest option is to have your rental property accountant work through the allocation correctly. Getting it wrong can result in over-claiming which leads to IRD interest charges and tax shortfall penalties.
What About Mixed Use Properties?
If you use the property yourself as well as renting it out, for example a bach or holiday home that you rent out for part of the year, the mixed use asset rules apply. This means you can only claim a proportional deduction on your mortgage interest based on how much of the time the property is actually rented out to earn rental income.
For example, if your holiday home is rented out for 90 days and used by you for 30 days in the year (with 245 days empty), the deductible interest calculation is based on the ratio of rental days to total used days. Getting this right requires careful record keeping of all dates the property is used or rented.
Similarly, if you rent out a room in your own home, only a proportion of your home loan interest is deductible typically based on the floor area of the rented room compared to the total house area. This is a common situation for NZ landlords who want to offset rental costs against their biggest loan.
Interest and Ring-Fencing Rules
It's important to understand how mortgage interest deductibility and ring-fencing work together — because one directly affects the other on your IR3 rental income tax return.
Your mortgage interest is one of your biggest rental property expenses. If your total allowable deductions (including interest) exceed your rental income, your rental makes a net loss. Under ring-fencing rules, that loss can't reduce your salary income — it gets carried forward as excess deductions instead.
Now that interest deductibility is returning to 100% from April 2025, many landlords who were previously making rental losses will start moving into profit — because they were only claiming 80% of their interest before. Once 100% is restored, claimable expenses go up, taxable rental profit comes down, and for some landlords the rental may now show a loss again under the residential property deduction rules.
Common Mistakes to Avoid
Claiming 100% before April 2025
The rate is still 80% for the 2025 tax year, which ends on March 31, 2025. Don't ask for the whole amount until 2026.
Mixing personal and rental loans
If your rental mortgage is linked to your personal accounts, you can only deduct the part that is related to the rental. IRD specifically flags revolving credit and offset facilities for review — these are one of the most common audit triggers in rental returns.
Refinancing without tracking
If you refinanced your rental property loan and took out some money for personal use, you have to split the interest. You can only claim the rental investment part.
Not keeping loan statements
IRD can ask for your loan statements from the last seven years. Always keep copies of your mortgage statements, bank interest certificates, and any paperwork related to refinancing.
What Other Expenses Can You Claim Alongside Interest?
Mortgage interest is the biggest deduction but it's not the only one. As a NZ rental property investor, you should be claiming all of these allowable rental expenses alongside your interest in your annual rental property tax return. Missing even one of these can mean paying more rental income tax in NZ than you should:
| Expense Type | Deductible? | Notes |
|---|---|---|
| Mortgage interest | ✓ Yes | 80% for 2025, 100% from April 2025 |
| Rates (council) | ✓ Yes | Fully deductible |
| Insurance | ✓ Yes | Building and landlord insurance fully deductible |
| Property management fees | ✓ Yes | Fully deductible |
| Repairs and maintenance | ✓ Yes | Must be genuine repairs — not capital improvements |
| Chattel depreciation | ✓ Yes | Carpets, heat pumps, appliances — often missed |
| Accounting fees | ✓ Yes | Fully deductible rental expense |
| Body corporate fees | ✓ Yes | Fully deductible |
| Capital improvements | ✗ No | Adds to property value — not deductible as an expense |
| Private expenses | ✗ No | Must relate directly to the rental activity |
📋 Key Takeaways
- Mortgage interest is the single biggest tax deduction available to most NZ landlords
- For the 2025 tax year (ending 31 March 2025), you can claim 80% of your interest
- From 1 April 2025 (the 2026 tax year), interest returns to 100% deductible for most residential rentals
- New builds have been 100% deductible throughout — the restrictions never applied to them
- Revolving credit and offset loans require careful interest allocation — IRD specifically audits this
- Mixed use properties (holiday homes etc.) can only claim a proportional amount of interest
- Interest deductibility works alongside ring-fencing rules — more deductible interest means more landlords may now make a rental loss that carries forward
Frequently Asked Questions
Make Sure You're Claiming the Right Amount
Getting interest deductibility wrong — whether over-claiming or under-claiming — costs landlords money. At Elite Taxation we handle rental property returns for landlords all across New Zealand and make sure the correct percentage is applied to the right loans every single year. Auckland, Wellington, Christchurch, Hamilton, Tauranga and everywhere in between.
Talk to Our Rental Tax Team →