Negative Gearing After the Interest Deductibility Changes: Does It Still Work?

For decades, negative gearing was a cornerstone of New Zealand property investment strategy. The ability to offset rental losses against other income made it easier to hold properties that did not generate positive cashflow, banking on capital growth to deliver returns over time.

The 2021 interest deductibility changes fundamentally altered this equation - at least for existing properties. Understanding these changes is essential for any property investor planning their strategy today.

What Changed in 2021

In March 2021, the government announced that interest on loans for residential investment properties would no longer be fully tax deductible. The changes phased in gradually, with deductibility reducing from 100% to 75% in October 2021, then to 50%, 25%, and finally 0% for loans drawn before 27 March 2021.

The rules created a stark distinction between new builds and existing properties. New build properties retained full interest deductibility, making them significantly more attractive from a tax perspective. The definition of "new build" includes properties with a Code Compliance Certificate issued within the previous 12 months, and the new build status lasts for 20 years from the CCC date.

In late 2023, the incoming National government announced a restoration of interest deductibility for existing properties. This phased back in from 1 April 2024 (80% deductible) to full 100% deductibility from 1 April 2025.

This means interest deductibility has now been fully restored for all residential investment properties - both new builds and existing properties can claim 100% of mortgage interest as an expense.

How This Affects Negative Gearing

Negative gearing occurs when your rental property expenses exceed your rental income, creating a tax loss. Traditionally, this loss could offset income from your salary or business, reducing your overall tax bill.

The key expenses for most landlords are mortgage interest, rates, insurance, property management, and maintenance. Of these, interest is typically the largest - often 60-70% of total expenses.

When you cannot deduct interest, or can only deduct a portion of it, your rental property loss for tax purposes shrinks dramatically even though your actual cashflow loss remains the same. You still lose money each week, but you get less tax relief for that loss.

Consider a property with $35,000 in annual interest costs, $8,000 in other expenses, and $32,000 in rental income. Your actual cashflow loss is $11,000 per year. Under full interest deductibility (now restored from April 2025), your tax loss is also $11,000, saving you $3,630 in tax at the 33% marginal rate.

During the restriction period (2021-2025), investors faced significantly reduced tax relief. For example, with only 50% deductibility, you could only claim $17,500 of the interest. Your tax loss would be just $6,500 short of break-even, saving you far less in tax despite the same actual cashflow loss.

Does Negative Gearing Still Work?

With full interest deductibility now restored from April 2025, negative gearing works exactly as it did before the 2021 changes. The strategy is back to full effectiveness.

For new build properties, nothing changed during the restriction period - they always retained full interest deductibility. This made them more attractive to investors between 2021 and 2025.

For existing properties, negative gearing is now fully viable again. Since April 2025, full 100% interest deductibility has been restored, meaning the tax treatment now matches what existed pre-2021. However, investors who purchased existing properties between 2021 and 2024 faced a challenging period where losses provided minimal tax benefit.

The strategy still relies on capital growth compensating for cashflow losses over time. If you are losing $200 per week after tax, you need the property to appreciate by at least that amount (plus your required return on equity) for the investment to make sense. In a flat or falling market, negative gearing simply means losing money.

When Negative Gearing Makes Sense

Negative gearing can still be a valid strategy in the right circumstances.

Higher-income investors benefit most because they receive tax relief at their marginal rate. An investor on the 33% marginal rate saves 33 cents per dollar of tax loss. An investor on 39% saves more. The tax shelter effect is more valuable for those paying more tax.

Long time horizons are essential. If you plan to hold the property for 10-20 years, you have time to ride out market cycles and benefit from the compounding effect of capital growth. If you need to sell within a few years, negative gearing is unlikely to pay off.

Location matters enormously. Negatively geared properties only make sense in areas with strong capital growth prospects. Losing money on a property in a stagnant market is simply losing money. Auckland, Wellington, and other high-growth areas historically justified negative gearing better than regional centres with higher yields but slower appreciation.

Your broader financial position is relevant too. Negative gearing requires you to fund the shortfall from other income each week. This needs to be sustainable for years, potentially decades. If the weekly cashflow drain would stress your household budget, the strategy may be too risky.

The Alternative: Cashflow-Positive Strategy

The interest deductibility changes prompted many investors to reassess their approach. Rather than relying on capital growth to eventually justify today's losses, some have pivoted toward cashflow-positive properties that generate income from day one.

This approach typically means looking at different property types and locations - often regional areas with higher yields, or multi-income properties like flats or units. The returns may be less spectacular than a leveraged Auckland investment in a booming market, but the risk profile is different.

There is no objectively "right" strategy. Your choice depends on your risk tolerance, time horizon, income level, and investment goals. What the 2021 changes did was shift the relative attractiveness of different approaches, making yield more valuable and pure capital growth plays less tax-efficient.

Tax Planning Considerations

If you hold existing investment properties, work with your accountant to maximise deductions within the current rules. Ensure you are claiming all legitimate expenses - not just interest, but rates, insurance, property management, repairs and maintenance, travel to inspect properties, and depreciation on chattels.

Consider the timing of maintenance and repairs. Large one-off expenses can be strategically timed to offset rental income in higher-income years.

For new purchases, the new build versus existing property decision is now more about location, yield, and LVR requirements than tax treatment - both now have full interest deductibility and the same 2-year bright-line period.

Bright-line implications interact with negative gearing too. From 1 July 2024, the bright-line period was reduced to just 2 years for all residential investment properties. If you sell within this period, any gain is taxable income. But accumulated losses can be deducted against that gain. The interaction between these rules can get complex, so professional advice is important.

Looking Forward

The tax landscape for property investors has been volatile, with major changes in 2021 and again in 2024-2025. Full deductibility has now been restored, but there is no guarantee the rules will remain stable. Future governments may change the settings again - there is a general election in 2026.

This uncertainty makes it important to ensure your investment strategy works across different tax scenarios. Relying entirely on tax benefits to make the numbers work leaves you vulnerable if those benefits disappear.

The fundamentals still apply: buy well, choose good tenants, manage costs, and hold for the long term. Tax treatment affects returns at the margin, but the core drivers of property investment success have not changed.