Do you own a rental property? Two major tax changes took effect in 2024 and 2025. Here’s a breakdown of what they mean for you.

Interest Deductibility

If you have a rental property with a mortgage, you can deduct the interest paid on the loan from your rental income when calculating taxable income.

Previous Rules (Introduced in 2021):

• For properties purchased on or after 27 March 2021, interest expenses were no longer deductible.
• For properties purchased before this date, interest deductibility was gradually phased out.
• New builds were exempt from these restrictions.

Current Rules (2024 Changes):

Interest deductibility has been reinstated, meaning all residential investment properties now qualify for deductions, regardless of purchase date or loan timing. This is being phased in as follows:

• From 1 April 2024: Investors can claim an 80% deduction on interest expenses.
• From 1 April 2025: Full (100%) interest deductibility is restored.

Example: How Interest Deductibility Affects Tax Savings

Consider an investor with:

• A $650,000 mortgage on a rental property (30-year term)
• A 5.29% p.a. fixed interest rate
• Principal and interest repayments
• A 33% tax rate

With interest deductibility increasing from 80% to 100%, the investor could save an additional $2,092 in the 2026 tax year, equivalent to $40 per week.

The Bright-Line Test

The bright-line test determines whether you need to pay tax on capital gains when selling a residential investment property within a specific period after purchase. Some exemptions apply, such as:

• The property is your main home.
• Transfers covered by rollover relief (e.g., relationship property agreements).

Previous Rules (Until 30 June 2024):

• For properties purchased on or after 27 March 2021:
  • New builds: 5-year bright-line test.
  • Other properties: 10-year bright-line test.
• For properties purchased between 29 March 2018 – 26 March 2021:
  • 5-year bright-line test applied.

Current Rules (From 1 July 2024):

The bright-line test has returned to two years. If you sell a rental property on or after 1 July 2024, capital gains tax applies only if you’ve owned the property for two years or less.

Key Exemptions:

• Main Home Exemption: The property qualifies if it was used as your primary residence for more than 50% of the ownership period (predominant use test).
• Rollover Relief: Now applies to property transfers between associated persons (e.g., close relatives, trust beneficiaries) if they have been associated for at least two years prior to the transfer.

Get Independent Advice

Changes to interest deductibility and the bright-line test may impact your investment strategy. It’s important to consult a tax advisor or accountant for guidance. Additional information is available on the Inland Revenue website.