How Will The Government's Tax Deductibility Changes Impact My Property Portfolio?

Last Updated: 28/04/2022


Ed McKnight

Economist, property investor and host of the Property Academy Podcast

How Will The Government's Interest Deductibility Changes Impact My Property Portfolio?

The news is in … the government's tax deductibility laws are now finalised and have been passed into law. That means that most property investors will begin paying more tax on their rental income.

Why? Because this change means the IRD will view investment properties as more profitable than they actually are in practice.

Because the properties will be viewed as more profitable, investors will then pay more tax.

Now that the law is passed, we know exactly how investors will be affected. That’s because when the changes were first introduced some 12 months ago, there were some uncertainties and what-if scenarios left unanswered.

The IRD now has a 216-page document to clarify any remaining question marks, as of March 31.

But it’s not all doom and gloom. The plan includes some workarounds that make the changes less painful than they could have been, particularly in regards to the bright-line test and for investors of New Build developments.

To make things easier, we’ve read the entire document and distilled the most important parts for you.

So, in this article you’ll learn what property types are “exempt” and who’s “not exempt” from this long-discussed tax law. You’ll also learn what the interest deductibility changes are and how they are likely to impact you as a property investor.

What The Changes Are

What Are The Interest Deductibility Changes And How Are They Different From How Tax Was Calculated Previously?

Before the changes came in, calculating your investment property’s taxable profit would include your interest costs as a taxable expense.

Here is an example of how an investor would make their calculations pre-October 2021:

Interest Tax Deductibility Calculation Before and After

After subtracting your operating expenses (e.g. rates and insurance) and interest costs from your rent, you get your taxable profit. You then multiply that taxable profit by your tax rate, e.g. 33% – and that’s the amount of tax you have to pay.

We’re ignoring some eligible tax deductions like depreciation, just to keep things really simple.

But what happens after this change?

Your interest costs no longer come into this equation. So your property looks more profitable and you pay more tax.

But … of course, you still have to pay your interest costs.

So what's changed?

The rent is the same, the operating costs are the same, and the interest costs are the same.

What's changed is the tax bill. The effect is that you'll receive a significantly higher tax bill each year.

And in some cases that will push properties from being positively geared to being negatively geared.

Scary stuff. But you also need to remember that property investors will not all be impacted equally. Some properties will be exempt from these tax changes.

Cash Flow Example

The $100,700 Difference These Changes Make to some Property Investors. Here’s Why

To give you an example of how the changes will impact property investors here is an example of a property investor purchasing a $800,000 townhouse in Auckland, which earns $675 a week in rent.

And let’s say that property was purchased just before the government introduced the tax changes – so that the deductibility is phased out (rather than being taken off straight away).

Based on the usual assumptions we use here at Opes Partners the property would require the investor to tip in $9,700 over the 15-year period of ownership – before the tax changes come in. This is because we forecast interest rates to rise in the future.

But after the tax changes come in the same property would require the investor to tip $110,400 into the property so that the bank account doesn’t tip into the red.

So that’s a $100,700 difference paid by the investor over time – just going towards tax.

However, not all properties are captured under these new rules. Some properties still get to work with the old tax rules. The exact breakdown of “what’s exempt” and “what’s not exempt” has changed a few times while the rules were being debated in parliament.

So, let’s go through the final tax rules and see which types of properties get to stick with the old tax rules, and which ones face the higher taxes.

New Builds

New Builds Get A Massive Tax Advantage Under the New Rules. Are New Builds Still Exempt?


New Builds have a 20-year exemption in the final rules.

That means they can continue to claim their interest for 20 years after the council issues the Code Compliance Certificate.

A New Build is defined as having a Code Compliance Certificate (CCC) dated on or after March 27 2020. This includes New Builds bought off the plans from a developer.

And the tax incentives are large. A New Build with a $1 million mortgage receives $13,200 of tax benefits per year compared to the equivalent existing property (assuming a 4% interest rate and 33% marginal tax rate).

But what’s the definition of a New Build: A self-contained residence that receives a Code Compliance Certificate (CCC) confirming the residence was added to the land on or after March 27 2020. This includes New Builds bought off the plans from a developer.

And as you’ll see below, there are a few instances where an existing property can be renovated to come under the definition of a “New Build” to claim this tax exemption.

So, this is a big win for many property investors.

Let’s look at other types of properties that either are or aren’t exempt from the new tax rules …

Relocatable Homes

#1 Property Type: Relocatable homes – Exempt

If you relocate a property onto, or move a property within, a piece of land you can still claim tax advantages.

Why? Because it’s classed as a New Build if it has a fresh Code Compliance Certificate (CCC).

So, if you pick up a house from down the street, move it onto your section and connect up to the services, it’s considered a New Build – according to page 74 of the IRD’s document.

What we like most about this ruling is: You don't have to move a property onto your land to get in on it.

For instance, if you nudge your already-existing house to a different part of your section (and get a new CCC) it becomes a New Build (at least for tax purposes).

But you need to have a valid reason for this. And the reason can’t be: “I wanted to move it a metre to the right to avoid paying tax on my interest costs.”

A valid reason would be:

"I relocated the house further forward on the section to make room to build a minor dwelling on the back.”

In that case, both are considered New Builds and receive tax incentives.

We’ve checked the document, and there is no guidance on how far the existing property has to move within a section. What’s important is the reason, not the distance.

For example, let’s say you own a bungalow on a section in Hamilton. You then decide to move the bungalow to the back of the section to make space for another dwelling. In this instance, the bungalow (and any new properties you build) will be considered a New Build.

Read more: Page 74 of the special report

Home and Incomes

#2 Property Type: Home and Incomes – Not Exempt

In the initial discussion documents, it looked like you could still claim part of the interest as a tax deduction if you have a home and income.

This is where you live in one dwelling on your property, and rent out another dwelling on the same site.

However, you can’t use the “own home” exemption to make your interest deductible in the final rules.

The final law states, unless you can come under the New Build exemption above, you are not exempt from the new tax change – according to page 35.

A home and income in the council's eyes is where the secondary dwelling has a separate entrance, separate utilities and a kitchen and bathroom.

This is key to figuring out what home and income box you fit into.

For instance, let’s say your home has two dwellings on the site – the main house and a minor dwelling out back that you rent out. You can no longer claim on the home you rent out.

This is entirely different to someone who chooses to rent out rooms within their main home. Because tenant’s use the same kitchen and living areas. You can still claim some of your interest as deductible in this instance.

Read more: Page 35 of the special report

Multi-Tenancy Conversions

#3 Property Type: Multi-Tenancy Conversions – Exempt

While we just said home and incomes will pay more tax under the new rules … a home and income property can receive an exemption if it is a New Build.

For instance, if you convert one dwelling into two – i.e. turn a property into a home and income property – both dwellings will be considered “New Builds” on completion. That means you can claim New Build tax benefits.

Yes, it’s still a home-and-income in the council’s eyes, but when you are splicing up homes the end result is a new Code Compliance Certificate and the 20-year New Build clock is reset.

For BRRRR investors, one way to do this is the classic strategy of converting a two-story building into two separate dwellings. So, one on each floor.

Read more: Page 81 of the special report

Social Housing

#3 Property Type: Social Housing – Exempt

The new tax rules offer significant incentives to rent your properties as social housing.

It’s now confirmed that you can continue to deduct your interest costs if you rent your property out to Kainga Ora (part of Housing New Zealand) or a Registered Community Housing Provider.

The financial incentive to do so is massive. For example, an investor with a $700,000 mortgage could save up to $7,000 a year if renting through the public housing system.

The term ‘public housing’ can be broken down into two groups.

  • State housing (organised through Kainga Ora)
  • Community housing (provided by Registered Community Housing Providers)

While Kainga Ora may be better known, property investors can qualify for the tax exemption on either group.

Community Housing Providers may sound like a new term, but they are often well known. They include the Salvation Army and Auckland City Mission, as well as other, lesser-known housing providers, like Link People.

There are 62 registered around the country; 30 in Auckland, 10 in Wellington, 4 in Christchurch and 1 in Hamilton.

Read more: Page 19 of the special report

Boarding Homes

#4 Property Type: Boarding Homes – Exempt (and not exempt)

The new tax rules create a new type of property called a “boarding establishment.”

It’s not the same as “boarding house” and it’s all to do with the number of rooms, exclusively for tax purposes.

The definition of a boarding house in the Residential Tenancies Act (RTA) is any property with 6 or more rooms, where each room has its own separate tenancy agreement.

By definition the new “boarding establishment” is a property with 10 or more rooms. Also, with all separate tenancy agreements. These rooms must not be self-contained, and there must be common living and kitchen spaces.

Boarding establishments are exempt from the new tax rules.

So, if your property has 10 or more rooms you can claim the tax benefits. But if you have between 6 and 9 rooms, you aren’t exempt and have to pay tax.

So, you may own a property that is a boarding house for tenancy purposes but isn’t a boarding establishment for tax purposes.

Student Accommodation

#5 Property Type: Student Accommodation – Exempt (with conditions)

Only properties operating as student accommodation in conjunction with a tertiary advisor are exempt from the tax changes.

For instance, if you own a 5-bedroom house near Victoria University and rent it out exclusively to students, but you don’t have anything official saying you are renting with the university, then you aren’t exempt and are subject to new tax deductibility.

But if you take your accommodation and operate with a tertiary provider then you are exempt.

Read more: Page 43 of the special report

Phase In

When Do I Have To Start Paying More Tax?

If you’re not captured under one of the above exemptions, then your property will most likely be considered existing. That means you’ll be caught under these new changes.

But, the way your properties are impacted depends on when you purchased them.

If you acquired the investment before March 27 2021, the changes will be phased in over 4 years.

If you purchased it after March 27, you won’t have the ability to claim interest expenses after October 1, 2021.

Here's a table that breaks down how the changes will be phased in.

Interest Deductibility Kain 001

If you qualify for the phased-out approach, then from October 1, 2021 you can still deduct 75% of your interest costs on any properties. This drops to 50% from April 2023, then to 25% in April 2024. From April 2025 no existing properties will be able to claim this deduction (unless exempt).


Does Investing In Property Still Make Sense?

The new tax rules have changed the game in property investment. For long-term property investors there are only two major strategies that still work:

1) The passive buy-and-hold strategy. This is where you buy a New Build and hold onto it long-term. This way you get access to the tax incentives for the next 20 years.

2) Renovate your properties to either fit the definition of a New Build or to increase the rent substantially. This will compensate for the extra tax.

This opens up opportunities for BRRRR investors, who will be out hunting for large homes to chop in two with a vengeance.

Most Impacted

Who Will Be Most Impacted By These Changes?

There are five groups of people who will be impacted most harshly by the changes:

  • People who invest in existing properties (not New Builds)
  • People who are on higher interest rates
  • People who are highly leveraged and invest with 100% borrowing
  • People who buy an existing property and don't conduct significant renovations
  • People who purchase lower yield, but higher growth properties
Interest Deductibility Kain 002

On the other side, some investors will be less impacted:

  • People who invest in New Builds
  • People who use a cash deposit (20%+) when purchasing investment properties
  • People who purchase existing properties to renovate, increasing the property's value and cashflow
  • People who invest in higher-yielding properties
  • People who manage their interest rate risk
  • People who rent their properties out via social and community housing agencies

These lists are not exhaustive; there are some other specifics in the legislation where some people will not be as impacted. So not every exemption is listed, but these cover the bulk of cases.

It’s also important to note that as an investor your properties are likely to have features from both lists. The true test is to run a 15-year projection to understand how your property may perform over time.

You can download our Return on Investment spreadsheet for free to do this at home.

How To Respond

What Can I Do To Respond To These Tax Changes With My Existing Portfolio?

These changes will cause many property investors to think about selling their properties. While that might be the end decision – before doing so, there are 5 steps you can take to respond effectively. We call them the 5 R’s.

#1 – Review your property portfolio

As we mentioned, not all rental property owners are affected equally by the tax changes. People with large mortgages will notice the changes more than people who hold less debt against their portfolios.

Because of this it’s important to run the numbers of your investment property to see how your properties will specifically be impacted.

To do this, Opes has created a spreadsheet – which you can download for free – to create this analysis. Download the spreadsheet here.

Some investors may not need to sell. Others will find they will need to make a change.

Interest Deductibility Kain 006

#2 – Rent, make sure you are charging market value for your property

If your property will have poor cashflow after the changes come in, then it’s time to review your rent.

The rental market is currently moving quickly as some investors are passing on a portion of the potential tax cost to their tenants.

The latest data showed that rents have risen 8.5% in the last year (February 2021 – February 2022), according to the Trade Me rental index.

Interest Deductibility Kain 007

This suggests there may be the opportunity for some rental property owners to increase their rent to market level to counter the effect of higher taxes.

This is where our property managers at Venture Management can help reassess your rent to make sure you’re getting the right amount of money coming in each week.

#3 – Restructure the property’s lending or tax structure

This gets a bit nerdy, but there are ways to decrease the costs associated with your rental property by restructuring how you own your rental property.

Under the new rules you will soon be able to move your rental properties between trusts and look-through companies without having to worry about the bright-line test (which taxes your capital gains).

Interest Deductibility Kain 008

Speak to your property accountant – because you may be able to move your properties to better protect your assets and move to a lower tax rate. This could potentially save you thousands on your tax bill once the new rules come in.

#4 – Renovate the property to increase rental return

If you’re still going to be left out of pocket from the tax changes, it’s time to renovate the property to increase the rent.

Some properties only require a cheap and cheerful renovation to increase the rent the investor can charge.

A couple of classic investment strategies include adding an additional bedroom within the internal floor plan and updating fixtures and fittings.

We here at Opes Partners call this Cashflow Hacking, and you can learn more about it by listening to this episode of the Property Academy Podcast.


#5 – Recycle – sell the property and purchase a more suitable investment

If your property is still looking shaky after taking these first 4 steps, then it may be time to recycle your equity. That means selling your property and purchasing a different investment.

In some instances you may be able to sell one property and buy two – given that New Builds are exempt from the changes and require lower deposits.

If you’re going to do this the most important aspect is choosing a property that works under the new tax regime. This is where speaking with a financial adviser may be a good idea.

The key message here is if you’re worried about the new tax changes … there are options and strategies you can use to counteract them.


What Are The Main Things I Need To Be Thinking About?

The critical message for property investors is not to panic. You have 4 years before the entire interest-deductibility changes are implemented on your current properties.

You need to take time to assess your portfolio to figure out what changes are required, if any at all. With enough changes your properties might remain positively geared.

Similarly, it's important to take anything you read on Stuff or the NZ Herald with a grain of salt. The new rules and the impacts are technical and individual.

We've already seen well-intentioned journalists representing something as fact when really the facts have been accidentally misreported.

If you want help examining your portfolio, we have recently launched a service to review your properties in light of these changes.

Who Are Opes Partners?

Who are Opes Partners and can they help me?

What is the 3-Step Opes Coaching Programme?

1. Plan out your property investment portfolio

The first step in the programme is to co-create a plan using our MyWealth Plan software. We built this software specifically to help Kiwis create a financial plan in under an hour.

You'll leave this 1-hour session with a written down plan. Pen to paper.

2. Pick properties that fit with your plan

Once you've created your plan in step #1 – your property partner will go out and find properties that fit your plan. They'll search through projects from up to 58 developers to find the best ones for you.

When you meet again, you'll review the top picks, go through the analysis, crunch the numbers together, and then decide which ones to hold with the developer.

3. Dig into the details – Confirm it's the right property for you

Once you've selected a property, you'll work for 10 days to make sure it's the right property for you. So you'll work with your Property Partner and Client Relationship Manager to dig into the details of the property.

You'll go and look at the development and be introduced to mortgage brokers, solicitors, accountants, and property managers. Their sole job is to help you figure out if this property works for you.

And you’ll have access to all the resources, tools, and data … so when confirmation day comes, you have confidence you know you’re making the right decision.

Who is the Opes Coaching Progamme the right fit for?

  • You understand the concept of property investment, but who wants help putting it into practice.
  • You want a “Done for you” property investment service, so you can be a hands-off investor.
  • You are someone who has at least a 10 year investment time horizon.
  • And finally, you’re ready to become a property investor.

Who is the Opes Coaching Progamme is NOT the right fit for?

  • You’re more into the smell of paint or the colour of a wall than the numbers that stand behind an investment property.
  • You only want investments that are hands-on, so you can save a few dollars here and there.
  • You have plenty of time on your hands and want to do the property investment process yourselves.
  • You’re looking for an overnight success and want to get rich quickly.

What does it cost to work with Opes Partners and go through the programme?

It’s free. Complimentary. No Cost.


The developer pays us a marketing fee when you confirm that the property is the right fit for you. Very similar to the way a mortgage broker gets paid by the bank.

Now it's important to note that we are paid the same fixed rate no matter what property you invest in.

If it’s a $500k apartment in Christchurch or a $1.3 mil 3-bedroom townhouse in Ponsonby – we get paid the same rate.

That's important because then we can recommend the right property for you, and there's no incentive to recommend you invest in a more expensive property, just so we get paid more.

I want learn more about how Opes can help me

Learn more about the Opes Coaching Programme Here


Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.