Interest Deductibility & Tax Impact for NZ Investment Property (Post-Reforms)
Dec 3, 2025
Our practical guide to interest deductibility for NZ investment properties - what you can claim, how ownership structures change tax outcomes, and what the latest reforms mean for investors.
We should highlight upfront that this article provides general information only and is not tax advice. Tax outcomes depend on your personal situation, structure, residency status, and property type. Always obtain advice from a qualified NZ tax professional before making decisions.
What Changed With NZ’s Interest Deductibility Reforms
NZ’s interest deductibility rules have shifted dramatically over the past few years, and many investors are still unclear about what they can claim. Before the reforms, investors could deduct 100% of interest on loans for residential investment property. That changed when deductibility was phased out for most existing properties, while new-builds retained favourable treatment. The post-reform landscape is now clearer: deductibility depends entirely on property type, purchase date and transitional rules. Below is a simplified comparison table:
Property Type | Interest Deductibility | Notes |
|---|---|---|
New-build | Fully deductible | Applies to qualifying new builds; typically remains deductible long-term |
Existing build (purchased before 27 Mar 2021) | Subject to phase-out rules | Depending on current settings, may now have partial or restored deductibility |
Existing build (purchased after 27 Mar 2021) | Often non-deductible | Unless restored under new government policy |
Build-to-rent | Deductible | Encouraged under current policies |
Short-stay / mixed-use | Complex | Private-use portion not deductible |
The core point: deductibility follows the property, not the entity. Your ownership structure does not override the property rules.
What Investors Can Deduct (and What They Can’t)
Most NZ investors can claim a range of legitimate property expenses. Deductible items typically include:
• Interest (where allowed)
• Rates
• Insurance
• Property management fees
• Repairs and maintenance
• Accounting fees
• Body corporate levies
• New-build allowances (where applicable)
Expenses you cannot deduct:
• Capital improvements (e.g., adding a new room or major renovation)
• Any private-use portion of a mixed-use asset (e.g., holiday home you also use personally)
• Principal repayments
• Depreciation on residential buildings
A simple rule of thumb: if the expense is to maintain the property or operate the rental, it’s likely deductible. If it improves or upgrades the property, it’s not.
How Ownership Structure Affects Interest Deductibility
Ownership structure changes how tax is calculated, but it does not change whether interest is deductible. That still depends on the property type.
Personal Ownership
Income taxed at personal marginal rates (up to 39%).
Interest deductibility aligns with the property classification.
Simple structure, common for first-time investors.
Bright-line applies as normal.
Trust Ownership
Trust tax rate is generally high if income is retained (39%), unless distributions are made. Deductibility still follows the property rules.
Pros: estate planning and asset protection.
Cons: higher admin, attribution rules, ring-fencing still applies.
Company Ownership
Company tax rate is 28%.
Interest deductibility still based on property type.
Losses retained in company (cannot offset personal income).
Non-resident shareholders must consider withholding tax and thin-capitalisation rules.
Look-Through Company (LTC)
Income/loss flows to shareholders personally.
Deductibility follows property rules.
Loss ring-fencing applies — losses can only be used against future property income.
Useful for small portfolio owners who want flexible tax flow-through.
Below is a simple comparison:
Structure | Tax Rate | Interest Deductibility | Loss Treatment | Notes |
|---|---|---|---|---|
Personal | Marginal (up to 39%) | Based on property | Ring-fenced | Simple |
Trust | 39% (unless distributions) | Based on property | Ring-fenced | Asset protection |
Company | 28% | Based on property | Retained in company | Good for scaling |
LTC | Shareholder marginal | Based on property | Ring-fenced | Flexible, but admin heavy |
Ring-Fencing of Rental Losses
Rental losses from residential property are ring-fenced. They cannot offset salary or other income. Instead, losses carry forward and can only be applied against future residential property income or gains.
Example: If your existing build has limited deductibility and high interest cost, you might generate an accounting loss — but you won’t get tax relief until the property becomes cash-flow positive or is sold (depending on rules). This catches many new investors out.
Bright-Line Test Interaction
The bright-line test still applies to most residential investment properties. Current period is 2 years for recent purchases, though earlier purchases may fall under different timeframes. Key points:
• The main-home exemption may apply if you genuinely live in the property.
• Interest deductibility does not change whether you owe bright-line tax — but good record-keeping matters for proving expenses.
• Investors planning to flip within the bright-line period need to account for tax drag and cashflow.
Impact for Offshore Investors
Non-resident investors face the same deductibility rules as NZ residents — what differs is tax treatment in their home country.
Key considerations:
• NZ-source rental income must be declared in NZ, and tax paid here.
• You must file an IR3NR return annually.
• Your home country may tax the same rental income; double tax agreements often allow credits.
• FX movements can trigger taxable gains in some jurisdictions (AU especially).
• Thin-capitalisation rules may apply if you control >50% of an NZ entity.
In short: offshore investors should always use a cross-border tax specialist.
Practical Examples
Case Study A: NZ Investor Buying a New-Build
• $750,000 new-build townhouse
• Full interest deductibility applies
• Investor claims interest, rates, insurance, and property management fees
• Cashflow often more favourable due to deductibility + healthier tenancy demand
Outcome: Strong tax efficiency and easier long-term hold.
Case Study B: Existing Property, High LVR
• $600,000 existing build purchased post-2021
• Limited or no interest deductibility depending on rules
• High interest costs + ring-fencing → taxable losses carried forward, not refundable
Outcome: Higher cashflow drag; investor must plan long-term.
Case Study C: Australian Resident Investor
• Owns NZ rental property
• Rental income taxed in NZ
• Declares same income in Australia
• Claims foreign tax credit for NZ tax paid
• Bright-line applies normally
Outcome: Needs cross-border advice, but deductibility rules follow NZ property law.
Case Study D: Trust Ownership
• Rental property owned by family trust
• Trustee rate 39% unless income distributed
• Interest deductibility follows property rules
Outcome: Asset protection benefits, but potentially higher tax on retained income.
How Investor Behaviour Has Shifted Post-Reforms
The deductibility landscape has reshaped investor behaviour across NZ:
• Surge in investment into new-builds and build-to-rent developments
• Reduced speculation in older existing stock
• More investors using trusts and companies for estate planning and tax management
• Longer-term hold strategies replacing quick flips
• Renewed investor interest whenever deductibility rules are relaxed or restored
The market has adapted — and understanding these rules is now core to building a resilient property portfolio.
Want to understand how interest deductibility affects your cashflow, borrowing power and long-term investment strategy? Book a strategy session with our team — we’ll help you compare structures and lender options so you can make smart, tax-efficient decisions.
Disclaimer
This article provides general information only and is not tax advice. Tax outcomes depend on your personal situation, structure, residency status and property type. Always obtain advice from a qualified NZ tax professional before making decisions.
Contact us
