The government recently announced the reintroduction of interest deductibility on rental properties, generating a lot of buzz in local communities across the country.
What is Interest Deductibility?
Interest deductibility allows property investors to claim the interest they’ve had to pay on the rental property loans essentially as an expense. As a result, this reduces their taxable income (the amount of income they pay tax on).
Why was It Removed?
In March 2021, the government announced that it was removing the ability to claim interest deductibility on rental properties. The decision was made as part of a wider effort to cool down the housing market and make property more affordable for first-time buyers. The government argued that the policy was unfair as it gave property investors an advantage over other taxpayers, and it also contributed to rising house prices by incentivising property investment.
The removal of interest deductibility was met with mixed reactions. Some Kiwis welcomed the move as a step towards a fairer tax system. While others criticised it for unfairly targeting property investors. Many investors saw the policy change as a significant hit to their cash flow and profitability, making property investment less attractive.
What Does the Reintroduction of Interest Deductibility Mean?
In 2023, the Act and National parties campaigned to reintroduce interest deductibility on rental properties. Now that it’s back in place property investors will once again claim the interest they pay on their rental property loans as an expense, reducing their tax liability. This will make property investment more attractive, and it is expected to stimulate demand for rental properties.
The Government decided to keep the rules as they were for the year ending March 2024, then phase in the change allowing investors to write off 80% of their mortgage interest for the year ending March 2025 and all of their interest in the March 2026 year.
Do All Property Investors Benefit?
It is expected to have a positive impact on the property market in New Zealand. Property investors will once again be able to claim interest as a tax deduction, which will make rentals more profitable and attractive to investors. This is likely to lead to increased demand for rental properties.
It is important to note that the reintroduction of interest deductibility will not benefit all property investors equally. Investors with high levels of debt and low rental yields are likely to see the most significant benefits, while those with low levels of debt and high rental yields may see little change.
While property investing is popular amongst NZ investors, it is just one option to consider. It’s always a good idea for investors to diversify their investments across asset classes. If you want to check whether you are on the right track, a great place to start is by having a chat with our partners at National Capital, who offer free KiwiSaver advice.
If you have equity in your property and are considering investment property, Money Compare has a ton of resources to help you make the right choice for your unique needs and goals. We can help you compare home loans and get you in touch with industry experts such as mortgage advisors who can provide assistance with mortgage rates and home loans.
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Author: Wayne Blomfield is a Financial Adviser at Saturn Advice Limited, a financial advisory firm that provides financial advice in relation to investments and financial planning. Saturn Advice Limited is a subsidiary of Saturn Portfolio Limited and sister company of National Capital Limited and Saturn Invest New Zealand Limited.
"Disclaimer: The views expressed in this article are the views of the author. The information provided is of general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances."
