Now that the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Act has been passed, interest deductions for borrowings on residential investment property will be re-introduced progressively.

For the 2024 income year, a 50% deduction will be allowable for interest on borrowings for residential investment properties acquired before 27 March 2021. In the 2024-2025 income year an 80% deduction will be available for all borrowings on residential investment property (including amounts borrowed for residential investment properties acquired after 27 March 2021), and then 100% for all interest on borrowings on residential investment properties in the 2025-26 year.

The focus of the interest limitation is on residential investment properties. Typically, this would mean a house or an apartment, whether it is used for providing short-term or long-term accommodation, or even left vacant. With the re-introduction of the interest deductions on residential investment property, the remaining interest limitation in the 2024 and 2025 income years leaves out:

• the main family home
• new build properties, which are exempt from the interest limitation rules
• property developers, who can continue to deduct interest expenses
• large scale ‘build to rent’ developments (subject to certain conditions)
• several types of residential property, including farmland, certain Māori land, student, employee, and rest home accommodation
• hotels, and other businesses set up to provide short-term rather than long-term accommodation
• owner-occupiers who rent to flatmates

The rules also allow for interest deductions on a taxable sale of residential property, although deductions may be limited to the gain on sale.

Talk to us about how the rules affect you.