New Zealand to remove interest deductions on second hand residential property

The New Zealand government has announced it will deny interest deductions on residential investment property acquired on or after 27 March 2021 starting from 1 October 2021, unless the residence is new or the owner is a developer (held as stock).

But in an absolutely ridiculous change, interest on loans for properties acquired before 27 March 2021 will be reduced over the next 4 income years until it is completely phased out. So if you just bought an investment property with a big loan, well before this announcement, the NZ government is going to retrospectively deny all the interest deduction you or any future buyer will get on the property. No that wont reduce the value of your investment…

This is the NZ IRD’s example with my complaining…

Ana acquired a rental property in 2017. Ana is charged $1,250 interest each month on her mortgage ($7,500 every 6 months). Ana has a standard balance date, ending 31 March.

Ken’s additional facts – Anna earns $90,000 NZD a year and so has a marginal tax rate of 33%. So the $15,000 of interest each year save her $5,000 in tax each year. That is a lot given a variable interest rate in NZ is around 4% and so Anna has only borrowed around $350,000 – its a small one bedroom unit in Auckland.

For the 2021–22 income year Ana claims 100% of the interest charged between 1 April 2021 and 30 September 2021, which is $7,500. Between 1 October 2021 and 31 March 2022 Ana is charged $7,500 interest but can only claim 75%, which is $5,625. The total interest Ana claims for 2021–22 is $13,125.

For the 2022–23 income year Ana claims $11,250 interest charged as an expense (75% of $15,000). For the 2023–24 income year she claims $7,500 interest charged as an expense (50% of $15,000). In the 2024–25 income year she claims $3,750 (25% of $15,000). From the 2025–26 income year onwards Ana is no longer able to claim any interest against her rental income.

Ken’s additional facts – Ana ends up paying $5,000 a year more tax for the next 10 years (if she does not hold it for 10 years the gain becomes taxable – see below) while she holds the property, meaning on a $350,000 property, this change means a medium income earner ends up paying another $50,000 in tax that she had no idea she would have to pay when she first entered into the arrangement.

This is just embarrassing and can only be seen as a money grab. Anna had worked out that with her income, the interest rates and the deductions she would get she could afford a $350,000 unit. Now she finds out she could only afford $300,000, but can’t sell out for 10 years or she loses 33% of as profit as well!

Denying negative gearing deductions for just one class of assets is awful policy to start (the value of second hand property drops and , but to do it retrospectively as well is just a lazy cash grab.

Just for completeness I should say that, under the current law in NZ, if a residential property is sold within 5 year after acquisition, the vendor is required to pay income tax on any profit made through the property increasing in value.The NZ government has also announced it intends to extend the period to 10 years for residential property except newly built houses. So in Australia we have a 50% capital gains tax and in NZ they have an effective 100% capital gains tax if you don’t hold the second hand residential premises for 10 years, and a 0% capital gains tax otherwise. Both have an effective exemption for main residences.


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