Interest deductibility rules and six exemptions where you can still claim interest as a deductible expense
By: Matt Morton
April 01, 2023

The new Interest Deductibility tax laws have been widely reported, but there are a number of circumstances where the new rules may not apply. These are great opportunities for investors to hunt out properties to buy that will still allow you to claim 100% interest as an expense.

But let’s take a step back for a second. If you’ve missed the gist of the new property tax law, it is essentially removing the ability to claim interest on a mortgage as an expense for property investors. For properties acquired prior to 27th March 2021, the ability to deduct interest is gradually being phased out, whereas for new loans drawn down after that time on investment properties, interest deductibility won’t be allowed from 1st October 2021 onwards.

In March 2022, the government announced how these rules will play out by way of a 215-page special report with an equally long name. Within the detail, the government has allowed interest deductibility to remain in certain circumstances and there are some gems to uncover.

The background
Firstly, you need to understand the intention of the tax law change. The government wants to encourage new supply of housing into the market, while allowing homeowners to compete for existing properties that both they and investors might like.

So, their answer for an existing house is to stop investors claiming the mortgage interest as an expense if you rent it out, but for a new dwelling you can fully claim the interest as an expense for 20 years. If you sell the new dwelling property within that time, whatever is remaining of the 20-year period passes to the new owner to continue making those interest deductions.

The new build 20-year timeframe starts from the date a Code Compliance Certificate (CCC) is issued, so long as it is after 27 March 2020.

This sounds great for new builds, but the problem is building costs have rocketed recently and these properties are out of reach for many. However, the government has allowed some existing properties to be fully interest deductible in certain circumstances; a loophole if you will. These are a few of the types of property you should look for.

Large house conversions
This is probably the best opportunity for our older and larger Dunedin property stock. If you take a large single dwelling and separate it into two dwellings, then you can claim 100% of the interest as a deductible expense for 20 years. Yes I know, this seems odd given it does not actually supply more bedrooms to the market, in fact probably less bedrooms in many cases, but it is a ‘loophole’ the government have given us.

Now, this does come with some caveats. A Code Compliance Certificate must be issued for the new dwellings in order to claim the 20 years of interest expense. This means all the correct building code requirements will have to be met, such as a consented firewall between the units, and the units must be fully self-contained.

There is no distinction between having the new dwellings within one title or as unit titles, but each will have pros and cons, such as saleability in the future, differing council rates and differing requirements for water feeds.

Relocating a house to a new property
An existing older dwelling can be transported onto a different piece of land and be considered a ‘new build’ under the tax laws. A Code Compliance Certificate would be needed for this to occur with a consent required for the piles, and so the 20-year interest deductible time frame would start from date of issue of that CCC.

This is a great opportunity if you can find the bare land, or a large section with another house and spare land to truck a new one on, so long as the zoning allows for this property.

Relocating a house within the same section
Now this is an interesting one. If you need to move an existing dwelling within the property in order to create space for another dwelling, either shipped in or built new, then the whole property becomes interest deductible for 20 years. Again, this is from the time of the CCC being issued.

How far do you have to move it? Well, there is no defined distance that an existing dwelling would have to move, but it must be for the purpose of creating space for another dwelling, and not for tax avoidance. So you would need to show how this applies.

If you did not need to shift the existing house to make way for a new dwelling to arrive or be built, then the new dwelling would be able to have the mortgage interest deducted, but the existing dwelling could not. An apportionment must be made and you will need your tax accountant involved to understand how that is calculated for your scenario.

Boarding House (in certain circumstances)
Boarding houses have their complexities in ownership and the government have just added another layer. A boarding house is able to have all the mortgage interest deducted as an expense if it has ten bedrooms or more, but not if it is nine or less. They have created a new name to distinguish this, so a boarding house with ten or more rooms is now a ‘Boarding Establishment’.

A boarding house of nine rooms or less is deemed by the government to be something a homeowner might want to purchase due to its size and so they consider this to be levelling out the playing field.

It is important to remember that if you find an eight or nine bedroom boarding house to purchase, or maybe you own one, and you decide to increase the number of rooms to qualify for the exemption, this could well trigger additional building code upgrades. Boarding houses are expected to have a Building Warrant of Fitness to operate and they come under the scrutiny of the Building (Earthquake-prone Buildings) Amendment Act 2016.

This means as you apply for consent to add more rooms, the process could trigger an update of the Compliance Schedule to the current building code, and/or the requirement to upgrade any earthquake strengthening if the property is two storeys and found to be under the acceptable thresholds.

Re-cladding a dwelling or fixing earthquake prone buildings
There is an exemption to allow a reclad for at least 75% of a residence, but this is only in the circumstances where the property has been identified with ‘significant weather tightness issues’.

This is based on an ‘objectively verifiable’ professional weather tightness report stating the issue. The property would be deemed unlawful for tenancy in this situation and by recladding the dwelling, you are adding the property back into the lawful rental stock pool.

The Code Compliance Certificate would have to be issued after 27 March 2020 evidencing that 75% of the cladding has been replaced.

The same applies to a building with an ‘earthquake prone’ rating and a professional report identifying the issue. Bringing the building into a ‘non-earthquake prone’ state with the appropriate approvals completed would allow for the 20-year exemption on interest deductibility rules.

Commercial Property with residential components
Commercial property is generally exempt from these new rules, however any residential activity within a commercial building is not exempt and interest cannot be deducted as an expense from the residential portion of the building. If you develop new dwellings into a building however, those new units would be considered new build and would qualify for the 20-year exemption.

Get advice
In all circumstances, it is highly recommended seeking specialist advice from your tax accountant and lawyer before purchasing a property with any thought to gaining an exemption. This is just an overview of the possibilities, but each scenario should be reviewed on its individual merits before purchase.

For a copy of the detailed government report, email me at

The statements made within this article are in the opinion of the individual writer only and do not constitute legal or specialist financial advice. Please seek independent legal advice when dealing with all property transactions.

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Written by
Matt Morton
Matt Morton & Co is a local Real Estate company firmly focussed on transparency and upfront values. We believe the process of...