Residential Properties – Interest Deductibility & Bright-line

Below we provide information on the rules regarding the Bright-Line test and the interest that investors are able to claim against residential property income. These rules apply to any house, apartment, or other such building that a person could live in. It does not matter whether the property is rented out long-term, used for short-stay accommodation, or even left vacant.

INTEREST DEDUCTIONS LIMITATIONS
New Builds – a property is considered a new build if it has received its Code Compliance Certificate (CCC) after 27 March 2020.
In these cases the investor is able to continue to claim 100% of the interest paid on the property loan against rental income – there is no interest limitation.
For other properties the rules are:
For the income year 1 April 2025 to 31 March 2026
Full interest deductibility is permitted for all residential properties.

For the income year 1 April 2024 to 31 March 2025
Interest deductibility is limited to 80% of actual interest incurred – irrespective of when the property was purchased.

For the income year 1 April 2023 to 31 March 2024
If purchased after 27 March 2021 – no interest deductibility is permitted.
If purchased prior to 27 March 2021 – interest deductibility is limited to 50% of actual interest incurred.


Residential Rental Loss Ring-Fencing
If net rental income results in a loss, the loss will be carried forward to offset future rental income.

BRIGHT-LINE
The bright-line property rule means that if you sell (or enter into a contract to sell) a residential property (excluding the family home) that has been owned for less than a specified period, any gain made will be taxable.

For any property sold after 1 July 2024 the property is subject to a 2 year bright-line period.

For property sold on 30 June 2024 or earlier the bright-line test will be:
Property purchased between 29 March 2018 and 26 March 2021 - subject to 5 year bright-line period
Property purchased on/after 27 March 2021 - subject to 10 year bright-line period
New builds (COC issued after March 2021) purchased after 27 March 2021 - subject to 5 year bright-line period


Property owners need to monitor ownership periods to ensure they meet their tax obligations. IRD automatically receives information on the timing of all residential property sales and will request a “please explain” if they consider tax obligations have not been met.