Understanding Interest Deductions for Landlords Selling Disallowed Residential Property in New Zealand

Introduction: As a residential landlord, it’s essential to stay informed about the tax rules and regulations that apply to your property investments. One important aspect to understand is the treatment of denied interest deductions when you sell disallowed residential property (DRP) in New Zealand. In this blog post, we’ll break down the key points of Section DH 11 of the New Zealand Income Tax Act 2007 to help you navigate this aspect of property taxation.



Background: Under the interest limitation rules, some landlords may have been denied deductions for interest expenses on their residential properties. However, there is a provision that allows these denied interest deductions to be deductible in the year you sell the disallowed residential property, provided the disposal is taxable.

Taxability of the Disposal: In general, if you sell a disallowed residential property and the disposal is taxable, the previously denied interest deductions may be claimed in the year of disposal. However, the outcome can vary depending on whether the property is taxable under the bright-line test or other tax rules.

Bright-Line Test: If the disposal is taxable under the bright-line test, the previously denied interest amount is treated as part of the property’s cost. This means that if you incur a net loss from the sale, the deduction for that loss will be limited under the existing rules for losses from the disposal of bright-line property. Any excess net loss can be forward and offset against future rental income if a portfolio property method is used.

Other Tax Rules: If the disposal is taxable due to other tax rules, the previously denied interest is allowed as a deduction in the year of disposal. However, it’s important to note that the interest, along with other property or portfolio expenses, will be subject to the residential rental loss ring-fencing rules if applicable. This typically applies when the property is subject to interest limitation.

Exceptions and Exemptions: It’s worth mentioning that the information provided above does not apply if any exemptions for land business, development, or new builds are applicable. In those cases, the interest is not subject to the interest limitation rules and can be deducted in the year it is incurred, provided it meets the general deductibility criteria.

Grand parented Residential Interest Deductions: If you have previously claimed grandpa rented residential interest deductions, they are not deductible again upon the disposition of the disallowed residential property. It’s important to be aware of this when considering the tax implications of selling your property.

Application Date: The new provision outlined in Section DH 11 came into effect on March 27, 2021, and applies to interest incurred on or after October 1, 2021.

Conclusion: Understanding the treatment of denied interest deductions when selling a disallowed residential property is crucial for residential landlords in New Zealand. By familiarizing yourself with the rules and exemptions, you can make informed decisions about your property investments and ensure compliance with tax regulations. Always consult with a tax professional or accountant for personalized advice based on your specific circumstances.