Interest Deductibility on NZ Rental Property in 2026

Few tax rules have changed as often for landlords as interest deductibility. If you own a rental in Auckland and have not looked at the rules since they started shifting in 2021, the short version is good news: since the 2025–26 tax year, mortgage interest on a residential rental is fully deductible again.

This guide is for owners who want to know exactly what that means for their tax return, and where the remaining traps are. It is general information, not tax advice. Your accountant should confirm how the rules apply to your loans.

How interest deductibility got here

Interest deductibility is the ability to deduct the interest on money borrowed for a rental property from the rental income, reducing the tax you pay on it.

For most of the last few years, that ability was restricted. Deductions were phased out for residential property from 2021, then the rules reversed:

• From 1 April 2024, landlords could claim 80% of the interest on residential rental borrowing.
• From 1 April 2025, interest deductibility was fully restored. You can claim 100% of the interest incurred.

The restoration applies regardless of when you bought the property or when the loan was drawn down. A property bought in 2022, which may have had no deductible interest at all under the old rules, is treated the same as one bought decades ago.

To put that in rough numbers: if your rental loans cost $30,000 in interest over a year, the whole $30,000 is now deductible against rental income. At 80% it was $24,000.

Which interest you can claim

The interest is deductible when the borrowing was used for one of two purposes:

• Buying the rental property. The interest on a loan taken out to purchase it.
• Improving the rental property. The interest on a loan taken out to make improvements, such as an extension or a kitchen replacement.

The improvement itself is a capital cost and is not deductible, but the interest on the money borrowed to pay for it generally is. That distinction trips people up, so it is worth separating the two in your records.

The use of the money matters, not the security

This is the point most owners get wrong. Banks secure loans against property, so it is natural to assume the interest follows the house the loan sits on. Tax does not work that way.

What matters is what the borrowed money was spent on:

• Borrowed against your home to buy a rental? The interest is generally deductible, because the money bought an income-earning asset.
• Redrew against your rental to buy a car or fund a holiday? That interest is not deductible, because the money went to private use.

If you have one loan facility covering both private and rental purposes, you need to allocate the interest correctly between them, and only claim the rental share. Revolving credit and offset accounts make this harder, because money moves in and out. Keep a clear record of each drawdown and what it funded.

Your main home is excluded

Interest on the mortgage for the home you live in is not deductible as a rental expense, and the restoration of interest deductibility did not change that. The same applies to any property you use privately.

There is one narrow exception worth knowing about. If you run your rental business from a home office, a share of your home mortgage interest may be claimable as a home office expense, based on floor area. That is a separate calculation with its own rules.

Interest-only and principal repayments

Only interest is deductible. The principal portion of a mortgage repayment reduces your debt, and that is a capital transaction, never an expense.

That is one reason some owners move to interest-only terms for a period. It does not change what is deductible, but it lowers the cash going out each month. Whether that suits you is a cash-flow and strategy question, covered in our guide to switching to interest-only lending.

Losses are still ring-fenced

Full interest deductibility can push a highly geared rental into a tax loss on paper, especially in the early years of ownership.

The residential property deduction rules, known as ring-fencing, still apply. Rental deductions can only be claimed against rental income. If your expenses exceed your rental income in a year, the excess is carried forward and used against rental income in a future year. It cannot be offset against your salary or wages.

Inland Revenue explains the ring-fencing rules, and the choice between claiming per property or across a portfolio, on its page about residential rental property deductions.

Interest that was disallowed in earlier years

Between 2021 and 2025, some interest could not be claimed. That disallowed interest is not necessarily lost.

If you sell a property and the sale is taxable, for example under the bright-line test or one of the other land sale rules, the interest that was previously disallowed can be treated as part of the cost of the property in the year you sell. That reduces the taxable gain.

This only matters if the sale is taxable, and the calculation is technical. If it could apply to you, raise it with your accountant before you sign a sale agreement.

Other details to check

A few situations need professional advice rather than a general rule:

• Different ownership entities. Companies, trusts and look-through companies are treated differently in places.
• Development and new builds. Specific exemptions applied under the old rules and can still affect older years.
• Mixed use. Holiday homes that are partly rented and partly used by you fall under separate mixed-use rules.
• Refinancing. Moving a loan between banks does not change its purpose, but restructuring it can blur the trail. Our note on refinancing an Auckland investment property covers the practical side.

What it means for your rental

Full deductibility improves the after-tax return on most leveraged rentals. It does not change the gross numbers: the rent, the rates, the insurance, the maintenance. Those still decide whether a property works.

If you are reworking your figures with the restored deduction, start with an accurate rent. A free rental appraisal gives you a current market figure for your property, and our guide to measuring rental yield shows how to put the numbers together.

Keep every loan statement, and keep notes on what each drawdown paid for. When interest is your biggest expense, good records are worth more than any other tax tip.