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Tax & AccountingApril 02, 2024

Interest deductibility restored for residential properties – what to look out for

The Government has delivered on its election promise of restoring interest deductibility for residential rental property owners. In this article, we provide an overview of the new rules and highlight some of the key points to be aware of.

From 1 April 2024, the ability to claim interest deductions in respect of residential rental properties will be phased back in, with full interest deductibility restored from 1 April 2025. The interest deductions (excluding interest for new builds) permitted before and after the change in the law are set out in the following table:

Period interest incurred Percentage allowed (under old rules) Percentage allowed (under new rules)
1 April 2024 to
31 March 2025
25% 80%
1 April 2025 onwards 0% 100%

The ability to claim interest will be phased back in accordance with the table above for all taxpayers, regardless of the date on which the property was acquired or the funds were borrowed. Note, no change has been made for the 2024 income year, and the ability to claim interest remains at 50% (unless an exception applies — for example, interest is fully deductible for new builds). Therefore, apportionment is still required for this income year and 2024 income tax returns should be filed on that basis.

For taxpayers who purchased a residential rental property on or after 27 March 2021, any interest incurred from 1 October 2021 in respect of borrowings was generally not deductible, unless an exception applied. These taxpayers will now be able to claim 80% of their interest from 1 April 2024, and 100% of their interest from 1 April 2025.

The interest limitation rules will no longer be needed once the ability to claim interest returns to 100% from 1 April 2025 and will be repealed from that date. However, a key point to note is that interest that has been denied as a deduction under the interest limitation rules will continue to be claimable when the residential property in question is disposed of and the disposal is subject to tax under the land disposal provisions. This would require taxpayers to keep a record of interest denied in the event a taxable disposal arises in the future.

Another point to remember is that the residential ring-fencing rules have not been repealed or amended. Broadly, under the residential ring-fencing rules, deductions relating to residential properties for an income year must not exceed the amount of income derived from that property. Property owners are unable to offset excess expenditure or loss linked to their residential properties against their other income (such as salary or wages, or business income) to reduce their income tax liability. Taxpayers should be aware that any interest deductions (including potential deductions when the property is disposed of) will continue to be subject to the residential ring-fencing rules.

The ability to claim interest will continue to be based on a standard year from 1 April to 31 March. For taxpayers who do not have a standard balance date, calculations will be required to work out the interest deductions based on different percentages for different parts of the income year. As an example, for a taxpayer with a 30 June balance date, interest deductions from 1 April 2023 to 31 March 2024 will be based on 50%. Interest deductions from 1 April 2024 to 30 June 2024 will be based on 80%.

Rizwana Saheed
Senior Content Management Analyst, Wolters Kluwer
Rizwana Saheed (BCom (Hons), MTaxS) works as a CCH senior tax analyst and has over 15 years of experience working in the tax field.
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