How interest deductions are affected

When you borrowed the funds determines if you can claim interest deductions.

If an exclusion or exemption applies, your interest deductions will not be limited under the interest limitation rules.

Funds borrowed before 27 March 2021

You can claim a percentage of the interest incurred for funds borrowed for properties acquired before 27 March 2021.

Use this calculator for each loan to help you work out how much interest is deductible.

Property interest phasing calculator

Funds borrowed on or after 27 March 2021

If you borrowed funds on or after 27 March 2021 for your property, interest deductions cannot be claimed between 1 October 2021 and the end of the 2023-24 tax year. However, a percentage of the interest can be claimed if you used those funds to acquire a property in 1 of the following situations:

• before 27 March 2021 (for example, you entered into an agreement, but settlement was in May 2021)
• because of an offer you made on or before 23 March 2021 and that offer could not be withdrawn before 27 March 2021 (for example, as part of the contractual terms and conditions in a tender process).

For tax purposes, a property is acquired on the date a binding sale and purchase agreement is entered into (even if some conditions still need to be met).

Refinancing on or after 27 March 2021

Refinancing up to the level of the original loan does not affect the deductibility of your interest. If you can claim a percentage of the interest for the original loan, then that treatment remains the same.

Loans in a foreign currency

If your property is financed by a loan in a foreign currency, any interest is non-deductible between 1 October 2021 and the end of the 2023-24 tax year. However, if you refinanced the loan with a New Zealand dollar loan, then you can claim a percentage of the interest for for the new loan from when the New Zealand dollar loan was drawn down.

Variable balance loans - revolving credit or overdraft

If you have a variable balance loan for your property, you need to trace each individual withdrawal and deposit to that loan account to work out the amount of deductible interest. To simplify the calculation, you can use the 'high water mark' method to work out how much interest is deductible.

Under the high water mark method, if your loan is solely used to finance the property, then any interest incurred is deductible subject to the phasing percentage if the balance remains at or below the balance as at 26 March 2021.

However, if the loan is used to finance a mixture of taxable and private activities, then you can calculate the amount of interest based on the lower of:

• the affected loan balance – this is the amount of the actual loan balance at any time that applies to the property (for example, exclude funds used to finance private expenditure)
• the initial loan balance – this is the loan balance on 26 March 2021. 

If the affected loan balance is lower than the initial loan balance, all interest incurred is deductible after applying the appropriate percentage for the year.

If the affected loan balance is higher than the initial loan balance, only the interest incurred up to the initial loan balance is deductible after applying the appropriate percentage for the year. The amount of interest incurred above the initial loan balance is not deductible between 1 October 2021 and the end of the 2023-24 tax year. 

Tracing loans used for both residential property and non residential property purposes

The interest limitation rules do not affect borrowings for non-residential property purposes. For example, if you borrow against a residential property to buy a truck for a transport business, your interest deductions are not affected.

If you have a loan drawn down before 27 March 2021 and used that loan for residential property and non-residential property purposes, you need to trace the loan and determine how much of the loan was used for residential property. 

Interest incurred on the portion of the loan used for residential property is subject to the interest limitation rules. 

The deductibility of the interest incurred on the non-residential property portion of the loan is determined under the other deduction rules.     

Untraceable loans

If it is not possible to reasonably determine how much of the loan was used for the residential property, a special transition rule applies (ending 31 March 2024). 

Under the transition rule, the loan can be treated as being used to acquire your other business property first (based on the market value of that business property) and then the balance is applied to the residential property.

If the balance of an untraceable loan on 26 March 2021:

• is less than the value of other income generating property held, the interest limitation rules do not apply
• exceeds the value of other income generating property held, the excess is treated as having been used to acquire the residential property. The interest limitation rules apply.

When a repayment is made reducing the balance of a single loan used for both purposes, the general rule is repayments are treated as being applied to the loan used for residential property first until the balance reaches zero. Unless the non-residential property that was held on 26 March 2021 is sold and the sale proceeds are used to repay the loan.