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2024 Interest Deductibility Changes in New Zealand Explained

Our guide explains the 2024 interest deductibility changes and how they property investors. We look at legislative updates, financial implications, and key facts to help you make informed decisions.
Updated 19 August 2024
Summary
  • Interest deductibility has been a critical topic for property investors in New Zealand, especially with the recent political shifts. New Zealand property investors have been experiencing a bit of whiplash in recent years, with the Labour government in 2021 announcing the removal of interest deductibility on rental properties. 
  • With the National Party's win in 2023, significant changes to the property tax laws affecting interest deductibility are underway. It offers 80% deductibility of interest costs from April 1, 2024, and full (100%) deductibility of interest costs from April 1, 2025.
  • The aim is to repeal Labour's changes (and phasing interest deductibility back into legislation). New Zealanders who thought the financials of owning and investing in rental properties in 2022- 2023 were getting worse may find it more financially beneficial to own and invest from 2024 onwards (relative to what it would have been like under Labour’s interest deductibility rules).​

To help explain the situation, our guide covers:
MoneyHub Founder Christopher Walsh's Disclaimer Statement:
"At MoneyHub, we aim to provide clear and accurate information about legislative changes affecting housing in New Zealand. We understand that housing policy is highly divisive and sensitive, especially as homeownership becomes increasingly challenging for many New Zealanders. Per research published in July 2025, less than half the population are likely to own a home in the next 25 years. I'm not happy about such a situation and invest in new MoneyHub resources to help people actively save, invest, thrive, reduce their costs and move towards home ownership. However, we have a lot of work to do.

This guide on the 2024 interest deductibility changes is based on recent legislative updates and economic data. We are not affiliated with any political party, and our analysis is intended to help you make informed financial decisions. We are not defending or promoting rental ownership; our guide is to inform on the law change.

MoneyHub cannot be held responsible for any financial outcomes resulting from these policy changes, and we urge readers to use this information as a basis for further research and consultation".
Christopher Walsh
​MoneyHub Founder

What is Interest Deductibility?

  • Interest deductibility allows property investors to reduce their taxable income by the amount of interest paid on their mortgage. This reduction lowers the overall tax payable, making it a crucial component of property investment profitability.
  • For property investors, interest deductibility means that the interest paid on a mortgage can be subtracted from rental income, reducing the taxable profit. For example, if an investor earns $50,000 in rental income and pays $20,000 in mortgage interest, only $30,000 would be considered taxable income.

How does interest deductibility work? What’s the logic behind it?

  • The logic with this deductibility is the same with any other business that removes expenses from their revenue – they haven’t truly made a “profit” if they have many costs that are tied to that revenue.
  • For example: if you run a bakery that sells croissants and generates $1,000,000 but it costs you $800,000 for the raw ingredients (flour, egg, butter, etc.), you wouldn’t expect to pay 28% tax on the $1,000,000 to the IRD (the company tax rate) because that revenue is not profit – you have significant expenses that were associated with that revenue.
  • In the same logic, a mortgage (and the mortgage interest) is a core cost associated with owning and renting out a property. If you treated a property investment like you did a business, you would expect to be able to deduct the mortgage interest (just like you could deduct the raw ingredients to make the croissant). By removing interest deductibility, the 2017-2023 Labour government effectively made property investing significantly different to every other form of business or investment (as with all other businesses you’re able to deduct expenses (to varying degrees) from your revenue to reduce your taxable income).

The background and rationale of Interest Deductibility

This is best explained by a brief history:

2021: Labour Government’s Removal of Interest Deductibility.
  • Under the Labour government, new interest deductibility rules were introduced in 2021, significantly impacting property investors. These rules prevented investors from deducting mortgage interest from their taxable income, effectively increasing their tax liability.  
  • Previously deductible as an expense, these interest costs were excluded under Labour's rules, which would have led to higher taxable profits and, consequently, higher taxes paid by landlords. Effectively, investors were taxed as if they had no mortgage despite having ongoing mortgage payments, which reduced their profitability. 

Why did Labour remove interest deductibility in the first place?
  • Labour’s Interest Deductibility Policy Labour’s policy changes in 2021 aimed to curb property speculation and increase housing affordability by eliminating mortgage interest deductibility for property investors. This policy effectively increased taxable profits for investors, making property investment less attractive and reducing their after-tax returns. 
  • Labour introduced these laws in an attempt to reduce investor demand for existing homes and give first-time buyers a better chance in the market. However, exemptions were made for new builds and social housing to encourage investment in new housing stock. 
  • Important Background: Unlike many OECD countries, New Zealand does not have a capital gains tax. The lack of CGT makes property investment particularly attractive, as capital gains on property sales were not taxed. To compensate for the absence of CGT and curb speculative investments, Labour introduced the removal of interest deductibility for landlords. This measure was seen as a temporary solution until a more comprehensive tax policy, potentially including CGT, could be considered. 

What was the criticism on Labour’s plan to remove Interest Deductibility?

The 2017-2020 Labour government had removed landlords' ability to offset their interest expenses against rental income taxes (known as ring-fencing of rental losses) in 2019. The rationale was to aid first-time homebuyers by making property investment less attractive to investors, therefore making it more affordable given lower demand. However, several issues were raised with this approach: 
  1. Inconsistency: The non-deductibility measure was inconsistent with international accounting standards. Typically, business costs incurred to generate revenue are deductible, and interest is a legitimate cost. Hence, tax should only be levied on net income after deducting such expenses. This principle applies to property investments just as it does to other businesses (like in the example above), where rents are taxed after deducting expenses like rates, insurance, and maintenance.
  2. Lack of consultation: The policy was implemented without prior consultation and was not presented to voters before its introduction, leading to surprise and discontent among stakeholders.
  3. Ineffectiveness: Critics argued that higher taxes do not necessarily lower prices. True economic wealth is derived from hard work, risk-taking, innovation, and productivity, not from increased taxation.
Since the implementation of non-deductibility, New Zealand has seen record-high rental prices, suggesting that landlords passed the increased costs onto tenants (although this is only a correlation, not a direct causation). This, combined with rising council rates, property insurance, and compliance costs, exacerbated the situation. 

Understanding the National Coalition Government’s 2024 Reinstatement of Interest Deductibility

National’s Reversal Plan National’s plan to reverse the interest deductibility changes, allowing investors to deduct mortgage interest from their taxable income once again, was intended to rejuvenate the property investment sector and provide relief to landlords.

When do the interest deductibility changes kick in?

  • ​The new government, influenced by the ACT Party's coalition agreement with National, is reversing Labour’s changes. Initially, the agreement suggested a phased reinstatement: 60% deductibility in 2023/24, 80% in 2024/25, and 100% by 2025/26. 
  • However, the updated plan accelerates this timeline, offering 80% deductibility of interest costs from April 1, 2024, and full (100%) deductibility of interest costs from April 1, 2025.
  • This shift means landlords cannot claim deductions retrospectively. ​

Why is interest deductibility such a big deal? Isn’t it a small part of property investing?

​Interest deductibility remains a significant factor for property investors. To illustrate the impact on property investors, the below are examples of the implications if the previous interest deductibility rules under Labour continued:
  • New Zealanders who purchased older properties after March 2021 were not able to deduct or claim ANY mortgage interest expenses.  
  • New Zealanders who purchased older properties before March 2021 were only able to claim 50% interest expenses.
  • New builds and social housing were allowed to deduct 100% interest expenses.
  • In other words, typical “mum and dad” investors who purchased older homes (the majority of New Zealand's housing stock) either before or after 2021 were significantly impacted by the interest deductibility rules from the Labour government. 

Who Benefits the Most from Interest Deductibility Changes? 
The reversal of the interest deductibility rules will benefit different investors to varying degrees, depending on factors such as the type of property, purchase date, and current use (e.g., social housing). Investors who bought properties after March 27, 2021, and those with existing properties not used for social housing will see the most significant benefits.

Understanding the Financial Implications of Interest Deductibility Changes for Property Investors

There are several benefits and arguably no downsides (for landlords), as (arguably) intended by government policy:

​​1. Improved Cash Flow: Reinstating interest deductibility significantly improves cash flow for property investors. By reducing taxable income, investors can retain more of their rental income, which can be reinvested, used to service mortgages or pass the cost savings onto tenants.

​2. Long-Term Stability and Certainty Benefits for the Property Market (and Property Prices): Over the long term, the reinstatement of interest deductibility may enhance the financial viability of property investments. Lower tax burdens usually mean higher net returns, making property investment more appealing and potentially stimulating the housing market. 

If these unexpected and unconventional property tax rules were to continue, it may make global property investors and local “mum and dad” investors anxious that another rule change is around the corner and prevent people from entering the market (or actively selling their properties to leave the market) reducing demand and increasing supply (which will provide lower long term returns for the New Zealand residential property sector).
​
3. Return to Standard Property Tax Rules (In Line with International Norms): Under Labour’s rules, investors were taxed as if they had no mortgage, leading to higher taxable profits and increased tax payments. National’s reversal allows mortgage interest to be deducted, reducing taxable profits and aligning tax liabilities more closely with actual financial performance.

Understanding National’s Main Political Rationale For Re-implementing Interest Deductibility

Anecdotally, rental prices have increased around New Zealand (particularly in main city centres), but whether this is solely or heavily attributed to the removal of interest deductibility is difficult to ascertain and prove. These are our assumptions:

1. The increased pressure on landlords as a result of the broader economic climate
  • Landlords have faced rising mortgage interest rates and increased limitations on interest deductibility, exacerbating the cost-of-living crisis. The interest deductibility policy change is intended to reduce these financial burdens, potentially lowering rents and increasing the number of available rental properties.
  • However, rising interest rates don't just impact landlords and mortgage holders – they also impact those less fortunate or those from lower socio-economic backgrounds who may be carrying large debt balances (given most credit cards or debt instruments that aren't fixed will rebase to the new OCR – which increased from 0.25% to 5.50 as of July 2024). 
  • The move has been welcomed by investors and researchers (who anticipated that Labour’s policy would likely have increased rents and financial pressures on some landlords). The Inland Revenue also opposed Labour's move, arguing it might help reduce house prices but would also likely increase rents and reduce new housing supply.

2. Creating a more competitive, dynamic rental market
  • The core theory behind reinstating interest deductibility is that it will boost competition in the rental market, making prices more affordable. Reducing the attractiveness of residential properties for landlords decreased rental supply and would likely increase rent prices. 
  • Generally, rental prices are more aligned with tenant income (e.g. rent to income ratio) rather than landlord costs, suggesting that the change may not significantly reduce rents. However, it could attract new investors (given investing in property would become more attractive given effective tax breaks), increasing rental stock (supply).
  • The incentive for investors to buy new builds might diminish, potentially reducing new housing developments, which are crucial for addressing the housing shortage. Ultimately, housing is driven by demand and supply – and a steady, substantial supply of new rental stock is necessary to address the underlying housing shortage rather than provide financial relief to landlords.
  • The problem with trying to tackle the property market from the “supply side” is that it takes many decades to see the full effects (given how long it takes to get consents, break ground and undertake construction on new build houses or apartments).​

What’s the main criticism when it comes to National’s re-implementation of interest deductibility?

  • The key criticism of National’s move to phase in interest deductibility is, per media reports, that it prioritises tax cuts for large landlords (who naturally own more properties than those who rent) over public needs like early childhood education and public transport fares.
  • The main rebuttal to this point (by commentators and researchers), however, is that the removal of interest deductibility (under Labour) increased landlords' costs, which in turn are passed on to tenants, contributing to the high rental prices in New Zealand.

Must-Know Facts About Interest Deductibility Changes

1. Whether interest deductibility changes will improve or worsen rental prices is up for debate. 
  • The overall impact of interest deductibility changes on New Zealand rent prices remains uncertain, with many experts predicting that it will only slow rent increases rather than reduce them.
  • The prevailing theory is that with interest deductibility now getting phased back in, there are more tax savings that are captured by landlords, which means some of this cost saving may be passed onto the tenants (or, at the very least, will prevent landlords from drastically raising rents on tenants to compensate for the loss of interest deductibility under the old rules).
  • The debate continues as stakeholders weigh the benefits of the policy against its potential to entrench existing economic disparities further.

2. The 2024 interest deductibility changes definitively make property investing more attractive, but the costs are still high.
  • While investment decisions should not be based solely on tax implications, these changes are favourable for current and prospective property investors.
  • The reinstatement of interest deductibility (in line with the rest of the world’s treatment of mortgage interest as tax deductible) and the reduction of the bright-line test period (which went from five years to ten years and has now been reduced to two years) are likely to enhance the attractiveness of property investment and reduce the lock-in period for property investors. 
  • Despite the ongoing high housing costs and complex planning regulations, these broad property tax reforms signal a potential resurgence in the property market.

3. Don't make any hasty decisions based on the 2024 interest deductibility changes.
  • Tax implications are only one aspect of a successful investment in property. With the New Zealand government ring-fencing rental losses in 2019, coupled with extremely high price-to-rent and price-to-income ratios in major cities like Auckland and Wellington, there may still be a rational argument to say that selling your property is the right call (especially when factoring in the tough economic environment New Zealand is going through with high mortgage interest rates and ongoing redundancies and layoffs).
  • While the financials are obviously important, many New Zealanders invest in property for non-financial reasons (location, freedom, family, accessibility, lifestyle, retirement, etc.). If the non-financial reasons are urging you to sell your property (e.g. you’re reaching retirement age and want to free up some cash), then don’t let these interest deductibility changes override your overarching life goals and general life situation.

4. Know that the interest deductibility changes will NOT be retrospectively applied (backwards).

Frequently Asked Questions

What else has the new National government implemented other than interest deductibility changes?

In addition to reinstating interest deductibility, the government announced changes to the Overseas Investment Act to facilitate foreign investment in build-to-rent (BTR) developments. This move aims to address the housing shortage by allowing foreign investors to participate in BTR projects, although the ban on foreign purchases of residential properties remains.

Will interest deductibility fix the housing market?

This is unlikely. These policy shifts reflect a broader recognition of the need for a balanced approach to housing affordability and investment but don’t guarantee quality housing and strong returns by landlords (which are often at odds with each other). 

Will restoring interest deductibility lead to lower rents?

This is unlikely (or has a minimal effect). Although the government promises relief for landlords and tenants, historically, rents rarely decrease. Instead, the policy might slow the rate of rent increases rather than reverse them. High migration rates continue to pressure rental stocks, and market forces will likely keep increasing rents.

Will a massive wave of property investors follow this interest deductibility change?

This is unlikely. Despite tax advantages, high mortgage rates and the overall cost of entering the property market remain substantial barriers.​

Why did Labour remove interest deductibility in 2021, and what was the general impact?

By removing mortgage interest deductibility, Labour aimed to curb property speculation and improve housing affordability. This policy was intended to make property investment less attractive, thus giving first-time homebuyers a better chance in the market.

​The removal of interest deductibility increased the taxable income for property investors, raising their tax liability and reducing profitability. This move led to criticism for being inconsistent with international norms and potentially contributing to higher rental prices.

​Is the interest deductibility change retroactive?

No, the reinstatement of interest deductibility is not retroactive. The phased reintroduction started on April 1, 2024, with no backdating to earlier periods.
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