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New Interest Deductibility Rules for NZ Holiday Homes

December 14, 2021
Garreth Collard from

By now you will likely be aware that the government has started reducing the ability to claim interest on existing rental properties, starting 1 October 2021. Several questions arise for holiday homeowners as a result which we’ll cover in this post.

By now you will likely be aware that the government has started reducing the ability to claim interest on existing rental properties, starting 1 October 2021. 

Several questions arise for holiday homeowners as result:

Does the interest deduction phase-out over the next 4 years affect holiday homes? If so, how? What about mixed-use asset (MUA) rules? Where do they fit in? Can you offset losses from one type of rental property against another e.g., long-term rental against holiday homes? Are there any circumstances where losses from renting out your holiday home can result in a tax refund? There have been many changes, and hence these are all good questions to review.

Phase-out of interest deductions

Firstly, let’s address the phase-out of interest deductions on residential rental property acquired before 27 March 2021. From 1 October 2021, interest deductions on existing rental property – whether long-term or short-stay – are being phased out. You can claim 75% of interest charged by your lender from 1 October 2021 to 31 March 2023, then 50% for the next financial year (FY24, the 12 months ending 31 March 2024), then 25% in FY25, then finally 0% interest deduction from FY26 onwards.  And at the same time, interest rates are rising. So, while you are still going to be paying the same amount of interest (or more) to the bank, the amount you can claim will decrease. This means that in real terms, your investment property will start to generate more and more taxable income with each passing year.

Two other points to keep in mind:

1.       If you bought a holiday home on or after 27 March 2021, and want to rent it out, then no interest deduction is permitted

2.       New builds are exempt from this interest phase-out. So generally, if your holiday home received its Council Code of Compliance (CCC) on or after 27 March 2020, then it will be classed as a new build, and therefore you’ll be able to keep on claiming 100% of the loan interest, for 20 years after the CCC is obtained!


What is ring-fencing? Well, previously if your rental property made a loss i.e., expenses were more than income, you could in many instances record that loss on your tax return. It could then be offset against your wages, putting you into a position of having been “overtaxed.” You would thereby get a refund of that overpaid tax.

However, the government put a stop to this from the 2020 financial year onwards. Instead, losses from rental property – including most holiday homes – were now ring-fenced. That loss could only be offset against other rental income.

So, here’s how it works these days. Let’s say you have a holiday home, and a rental property.  The holiday home runs at a loss i.e., expenses are more than income, but your rental property makes a profit.

So long as both the loss and the income stream to the same ultimate owner/s, then you can offset one against the other, and potentially end up with your rental income being tax-free.

That brings us to the next complication: Mixed Use Assets or MUAs

Mixed-Use Assets (MUAs)

Inland Revenue define a MUA this way:

Mixed-use assets include holiday homes with both private and business use. You have a mixed-use asset if during the tax year the asset is:

·     used for both private use and income-earning use, and

·     unused for 62 days or more. 

The rules apply to any:

·     property, regardless of cost price or current value

·     additional item or accessory relating to the asset, for example a quad bike stored at a holiday home.

 So, how does this work? Well, if your holiday home is a MUA, then some expenses must be apportioned. For example, expenses directly related to the stay e.g., cleaning, can be claimed in full. But expenses that are not, e.g., rates, insurance, must be apportioned.

To work out the apportionment, you need to keep track of nights rented to the public and nights in which you stay in the place to repair it, vs nights empty and/or rented out to family and friends. This percentage is then used to determine how much of the annual expenses you can claim.

Some management websites e.g., Bachcare, have a cool portal which shows you how you are tracking for the year, and where you are in relation to the “opt out” threshold and the 2% of Council Valuation (CV) threshold.

Find out more about Bachcare membership

More info

Which leads us to…

Opting out of the MUA rules

You can opt out in some circumstances. For example, you can choose to not declare income from your holiday home if it is less than $4,000 for the tax year. You can’t claim any expenses if you opt out.


What about GST? Well, if your revenue (that is, total sales of accommodation) is more than $60,000 in a financial year (that runs from April to March), then you need to register for GST.

However, be careful! This will pull the holiday home into the GST net, and it means that when you sell it, you will have to charge GST on sale unless selling to a GST-registered buyer.

You will want to get specific tax advice if you are nudging this GST threshold, as there are legitimate methods to ensure GST is correctly paid but keep the holiday home out of the GST net.

The way the new laws apply vs MUAs

So, how do you determine what applies and when? Here’s a simple step-by-step guide:

1.       Is the holiday home a new build?

a.       If no, then an interest deduction applies

b.       If it is, then 100% interest can be claimed

2.       Was the holiday home acquired before 27 March 2021?

a.       If yes, then there is a four-year phase-out.

b.       If no, then no interest can be claimed at all

3.       Is the holiday home a MUA?

a.       If yes, MUA formula must be applied.

b.       If no, then MUA formula not applied. If the year-end result is a loss, any loss is ring-fenced; loss can be offset against other residential rental income or carried forward

4.       Is the gross income (i.e., before expenses) less than 2% of Council Valuation (CV)?

a.       If yes, loss is ring-fenced; loss can be offset against other residential rental income or carried forward

b.       If the gross income is more than 2% of CV, then, the MUA loss can be offset against any other income, not just rental income. (This might just result in a tax refund if things are structured correctly)

To conclude

Phew! There is a lot to consider! In summary, there is money to be made from renting out a holiday home, but it is well-worth consulting with an experienced property accountant beforehand. Knowing what and how much you can claim, what the limits are, and where the danger points are will make all the difference.

Having the right structure helps too!  And of course, engaging with partners like Bachcare takes a lot of the mental strain away.  Yes, there is added complication these days, but if you surround yourself with trusted professionals, you can enjoy the rental income without worrying about the compliance.

This article was produced by and is not intended as personalised financial advice. All numbers are meant as examples and not indicative of any property in particular.

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