Rental housing interest deductibility

Rental housing interest deductibility

Joseph Darby

Property investors will have a 20-year exemption for newly built houses in a confirmed tax change meant to deter property investment

A newly built property that received its code compliance certificate after 27 March 2021 will be eligible to deduct interest for up to 20 years from the time the property's code of compliance certificate (CCC) was issued.

The exemption will apply to both the initial purchaser of the new build and any subsequent owner within the 20-year period. It will also be applied to purpose-built rentals.


A raft of changes were announced in March to try and bring down property prices, including removing tax deductions on interest costs for rental properties, because property investors made up the biggest share of buyers in the housing market.

The interest deductibility policy meant deductions on existing properties bought after March 27 would not be allowed, while deductions for existing properties bought before that date would be phased out between 1 October 2021 and 31 March 2025. While the timeline for the phasing out of deductions was always clear, until the recent announcement there was a lot of uncertainty around what qualified as a new build property.

To further reduce the incentive to invest in property, the government increased the bright-line test - income tax paid on any gains from residential property - from five years to 10 years.

Tax changes always meet with some sort of controversy, and in this case as the interest deductibility rules came into effect on 1 October 2021, among other complaints the government has been criticised for releasing details of the policy exemptions only a few days before the change.

What the experts say about the confirmation of this tax

Here’s a few “quick takes” from various people and organisations:

  • Kiwibank senior economist Jeremy Couchman​ said the announcement did not alter the bank’s housing market outlook. The policy was unlikely to impact on construction activity in the near-term as the building pipeline was long and capacity constraints were a more pressing issue, Couchman said.
  • NZ Property Investor Federation executive officer Sharon Cullwick​ said the policy could have been better and most investors would prefer it was not in place at all. The new tax approach to property investment differs from the tax approach to other businesses and goes against internationally accepted tax best practice. “Investors are running a business and, like other businesses, we need to get back our costs, and people will increase their rents to do so. That means it is a bad policy for the 1.5 million tenants out there. It is not a policy that helps them at all, rather it is a ‘tenants’ tax’.”
  • Finance Minister Grant Robertson acknowledged that tax is "neither the cause nor the solution to the housing problem, but it does have an influence, and this is part of the Government's overall response".
  • It is also interesting to note that since the tax changes were first announced (in outline) in March, house prices have not stopped increasing. CoreLogic's recent Housing Affordability Report showed affordability was "as bad as it's ever been" with the average property value across New Zealand 7.9 times the average annual household income, a record high in its 18-year history.
  • CoreLogic chief property economist Kelvin Davidson​ said any impact the policy had on prices would be due to an increase in supply, rather than a change in demand for new builds. “Traditionally, first home buyers like new builds, but pushing investors towards new builds will create more competition for first home buyers. It’s ironic given the Government wants to level the playing field for them.”
  • Infometrics senior economist Brad Olsen said clarification of the policy details was welcome although overdue, and that one area to watch was the impact on rental costs. With mortgage rates set to increase, the cost of mortgage debt would also go up and this could get figured into the cost equations of rental property owners, he said. “This policy will increase the costs to landlords, and they are likely to charge their tenants more as a result, but they were doing so anyway, so it remains to be seen how far it could go.”

The bottom line – details of rental property interest deductibility

The majority of property commentators don’t think the tax changes will achieve the goals of the government.

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