New Zealand: Interest deductions for residential landlords, revised tax treatment

New Zealand: Interest deductions, residential landlords

The government’s decision to treat interest deductions for residential landlords as a “loophole” has generated debate.

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Most voters view a residential landlord as deducting interest and making non-taxable gains as a perceived problem or loophole. However, according to some residential property investors, the rents they are charging barely cover their costs. A reasonable conclusion from this is that borrowing to buy an investment property supports two uses—renting it (a taxable use) and holding it for future gains (generally not a taxable use). This suggests that the treatment of 100% deductibility of interest may not be appropriate.

How to split interest between the different uses for the borrowing is the challenge. The current interest split is 100% to rental use and 0% to holding for future capital gain. The government has decided to revise this treatment with a split of 0% to rental use and 100% to future capital gains for existing rental property stock.

The government’s solution therefore assumes future growth in house prices as the justification for the non-deductibility of interest (it assumes the capital gain must be the sole reason for buying investment properties).

Read an April 2021 report prepared by the KPMG member firm in New Zealand

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