Rental property interest: deductions after the phase-back
Interest deductions have been fully restored, while private-use exclusions, general deductibility and residential excess-deduction rules still matter.
On this page
- Restoration began
- 1 April 2025Inland Revenue, property interest rules
- Current interest percentage
- 100%, subject to general deductibilityInland Revenue, property interest rules
- Previous phase-back period
- 80% from 1 April 2024 to 31 March 2025Inland Revenue, property interest rules
- Private interest
- Not deductibleInland Revenue, property interest rules
The restored rule
Inland Revenue states that from 1 April 2025, 100% of interest incurred can be claimed, subject to the general deductibility rules. This restored rule continues to apply after the phase-back period, including the current tax year. It is not a new annual allowance or a projected future percentage. The amount remains dependent on interest actually incurred and on whether that expense qualifies for a deduction. Inland Revenue, property interest rules (opens in a new tab).
What changed in the phase-back
For interest incurred from 1 April 2024 to 31 March 2025, Inland Revenue states that 80% could be claimed, regardless of when the property was acquired or the loan drawn down. That historical period is separate from the fully restored treatment. A return for an earlier period still needs the rule for that period; a later policy does not retrospectively turn every historical interest expense into a full deduction. Inland Revenue, property interest rules (opens in a new tab).
Private use remains outside the deduction
Full restoration does not make private interest deductible. Inland Revenue says the interest must not be private in nature and must meet the general deductibility rules. It distinguishes a main home’s private use from income earned through flatmates or boarders, where some interest may be claimable against that income. This distinction concerns the purpose and use of the borrowing and property, rather than simply whether a mortgage exists. Inland Revenue, property interest rules (opens in a new tab).
An allowable expense is not an immediate refund
Rental income is generally taxable in the year earned. Inland Revenue describes working out taxable rental income by deducting allowable expenses from gross rental income. If residential rental expenses exceed rental income, the excess generally cannot be offset against unrelated income such as salary or wages. Excess deductions are generally carried forward until there is residential rental income against which they can be used. Inland Revenue, residential rental income (opens in a new tab).
Interest and other rental expenses are separate
The rental-income guidance makes clear that income and expense treatment differs by property type. Long-term residential renting and short-stay accommodation also have different GST treatment. Restoring an interest deduction does not answer every tax question about a rental business, property sale or mixed-use home. It addresses a particular expense within a wider tax calculation and does not establish the treatment of every other cost of ownership. Inland Revenue, residential rental income (opens in a new tab).
Scope of this explanation
Parliament legislates tax rules and Inland Revenue administers them. This is general information about interest deductibility, not a calculation of an individual return. No calculator on this page determines allowable rental expenses, traces mixed-purpose borrowing or allocates excess deductions. A mortgage repayment estimate includes principal as well as interest; its total payment is not a rental tax deduction.