The Government has launched a public consultation on designing new rules to limit interest deductibility for residential property investors.

The goal of the changes is to support more sustainable house prices, including by dampening investor demand for existing housing stock, and to improve affordability for first-home buyers.  The changes to interest deductibility and the extension of the bright-line test were announced in March as part of the Government Housing Package.

Property development and new build properties will be exempt from the changes, to ensure that much-needed new housing supply continues to be built.

For more information please see:

Feedback on the discussion document can be sent to with “Design of the interest limitation rule and additional bright-line rules” in the subject line. Feedback must be received by 12 July.

There is an opportunity for people planning to make a submission to ask officials questions about the discussion document.  The dates and times of those opportunities will be available on the tax policy site soon link)

The consultation document proposes:

  • Deductions for interest expenses on residential properties will be restricted from 1 October 2021.
  • Grandparented interest (interest on a mortgage on a residential investment property acquired before 27 March 2021) will be gradually phased out between 1 October 2021 and 31 March 2025. Non-grandparented interest would immediately cease to be deductible from 1 October 2021.
  • Property development and new builds would be exempt from the interest limitation rules. In addition, new builds would be subject to a five year bright-line test, rather than the ten-year test. The definition of a new build property is considered in the discussion document.
  • Non-residential properties (for example commercial or industrial properties) would not be subject to the new rules. Also excluded would be employee accommodation, farmland; care facilities such as hospitals, convalescent homes, nursing homes, and hospices; commercial accommodation such as hotels, motels and boarding houses; retirement villages and rest homes.
  • The main home would not be affected by the new rules. Interest related to any income-earning use of an owner-occupier’s main home such as a flatting situation would continue to be deductible.
  • Community housing providers and other non-government providers such as iwi will not be affected by the interest limitation rules if they are charities or otherwise tax exempt. The Government also proposes to exempt Kāinga Ora and its wholly owned subsidiaries from the interest limitation rules.
  • The discussion document does not propose any concrete options in relation to tax treatment of whenua Māori or other Māori housing. Government is seeking information to better understand how different Māori housing developments are financed and structured. Where Māori entities have charitable status or other tax exemptions, they will not be affected.

The measures will be introduced into Parliament in a tax Bill later this year and will apply from 1 October 2021.