Interest deductibility explained: Is it a tax cut for landlords? - The Front Page

Associate Finance Minister David Seymour says the Government’s restoration of interest deductibility for landlords will ease pressure on rents and simplify the tax code. Photo / Michael Cunningham

The Government has announced it will restore mortgage interest deductibility for residential investment properties. So, what is interest deductibility now that it’s back?

To understand the current Government’s policy, it’s best to wind back the clock to 2021.

This is when the Labour Government announced it was removing the ability for residential investment property owners to deduct interest costs from their tax bills, which increased the amount of tax investors paid.

New Zealand Herald deputy political editor Thomas Coughlan told The Front Page this was sparked by the house price boom in the wake of the Covid-19 pandemic.

“The housing market went absolutely nuts and the Government got spooked. They were elected on a first-home buyer promise and they were clearly not able to deliver on that promise because they had lost control of the housing market.”

One of the policies Labour introduced to try to bring the housing market to heel was changes to interest deductibility rules.

Coughlan said the status quo at the time was that “if you’re a landlord, you’re in the business of selling accommodation and so, just like any other business, you were able to deduct your costs from your revenue to reduce your tax bill”.

There was concern that this created an imbalance between investors and first-home buyers vying for the same properties, Coughlan said.

“Investors are able to pay more because they know that they’ll be able to deduct those interest costs from their tax bill. The [Labour] Government introduced rules that prohibited this.

“From the time they were introduced in 2021, any new houses that were sold to investors you would not be able to deduct your interest costs.

“If you already had an investment property, you had to phase down the amount of interest you could deduct each year.”

The current National-led Government will switch this back.

“Over the course of this Parliament, this will phase back in again so, by the end of Parliament, if you’re a landlord, you will be able to deduct your interest costs from your tax bill,” Coughlan said.

The Government has said this will ease pressure on rents and simplify the tax code.

While this change could be seen as unfair to first-home buyers, the rules introduced by Labour could be seen as unfair to landlords.

“If you run a grocery store, you’re allowed to deduct your costs from your tax bill but, if you’re a property investor, then one of your main costs you’re not allowed to deduct,” Coughlan said.

“So, that’s the debate.”

Listen to the full episode to hear more from Thomas Coughlan about whether the latest interest deductibility changes are a political win for the Government.

The Front Page is a daily news podcast from the New Zealand Herald, available to listen to every weekday from 5am. This episode was presented by Georgina Campbell, a Wellington-based reporter who has a particular interest in local government, transport, and seismic issues. She joined the Herald in 2019 after working as a broadcast journalist.

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