Smart tax planning for residential landlords
As 31 March 2026 approaches, now is the perfect time for residential rental property owners to take stock of their financial position, confirm compliance, and identify opportunities to optimise tax outcomes. Recent rule changes, particularly to interest deductibility, bright line, and tenancy laws mean that this end of year review is more important than ever.
Keep records of rental income & expenses
Maintaining complete and accurate records is a legal requirement. You must keep records of all income, expenses (with invoices), bank statements, property purchase/sale documents, and details of any capital improvements.
Before year end, review all rental income received and ensure that any arrears or discrepancies are followed up promptly. If a portion of rent is deemed non-recoverable, it should be written off before 31 March to avoid paying tax on income that will never be collected. Also review other receipts, such as bank incentives from refinancing, as these are taxable when received.
Keep detailed records of all deductible expenses, including advertising, depreciation, insurance premiums, legal fees under $10,000, property management fees, repairs and maintenance, rates, tax preparation fees, and travel for inspections or maintenance work including any out-of-pocket expenses.
Repairs vs capital improvements
A key area of focus for Inland Revenue is the distinction between immediately deductible repairs and maintenance and non-deductible capital improvements. The tax treatment depends on identifying the asset being worked on and the nature and scale of the work. Generally, repairs undertaken to maintain an asset in its original condition are deductible; improvements are capitalised. Low value assets under $1,000 may be fully deductible if conditions are met.
Some expenses fall in the grey area and require careful assessment. For instance, asbestos removal is a common and often costly issue for owners of older properties. The tax treatment of the costs varies significantly depending on the situation and scope of work.
Full mortgage interest deductibility returns in 2025/26
The interest limitation rules, which phased out the ability to claim interest on loans for residential property, have been repealed. Starting from 1 April 2025, you can claim 100% of the interest incurred, provided there is a direct connection between the loan and rental income. This removes the previous phasing rules and complex carve outs that applied in prior years. Keep in mind, it is only the interest that is deductible, not the mortgage principal.
If you sell a property and the sale is taxable (e.g., under the bright-line test), you may be able to claim a deduction for interest that was denied under the old rules in previous years.
The new year is a good time to review loans and interest rates, however, be careful to ensure you protect the tax deductibility of interest and seek advice prior.
Mortgage refinancing: tax implications
Refinancing a mortgage on a rental property can have tax implications, primarily related to interest deductibility. The key principle is "tracing" the use of borrowed funds.
Residential ring fencing rules still apply
Residential rental deductions remain capped at the amount of rental income earned for the year. Excess deductions cannot offset other income, and must be carried forward for future rental income years.
Mixed use asset rules may apply to properties used partly for income and partly privately (e.g., a holiday home unused for ≥62 days), affecting apportionment and carry-forward deductions. These rules are complex, so it is important to seek advice.
Bright-line tax - test reduced to two years
For properties sold on or after 1 July 2024, the bright-line test applies only if sold within two years of acquisition with the gain taxable. Always confirm your bright-line start and end dates carefully, as mistakes can be costly.
However, even when outside bright-line, other tax rules (such as intention to sell or patterns of buying/selling) may still impose tax on profit. This is a complex area of tax rules. Please consult your tax adviser before making any decisions on sale of property.
Healthy homes compliance & maintenance review
Ensure all Healthy Homes standards (heating, insulation, ventilation, moisture ingress, drainage, draught stopping) are met and fully documented.
Improvements made to comply with Healthy Homes Standards may require revenue and capital split. In these situations, it is important to keep a detailed record of work done and obtain a breakdown of costs for separate items.
Annual portfolio review
Year end is an ideal time to review:
- Long term maintenance needs for properties
- Whether ownership structure (individual, company, LTC, trust) remains suitable for your circumstances
- Financing strategy, given shifts in interest rates and lending conditions
- Whether buying or selling is anticipated in 2026, with attention to the updated bright-line and interest rules.
Properties held in trusts
Many investment properties are held in family trusts. It is vital to be aware of the tax implications if trustees or beneficiaries move overseas. For instance, if a trustee of a New Zealand trust becomes a tax resident of Australia, the trust may become subject to Australian tax on its worldwide income, even if all its income is from a New Zealand rental property. If you, a trustee, or a key beneficiary are considering moving overseas, obtaining specialist cross-border tax advice before the move is critical.
Seek professional advice
Frequent legislative updates mean landlords should keep themselves up to date with all facets of tenancy and tax laws. In times of doubt or for complex scenarios, seek professional guidance from your tax specialist to ensure compliance and to optimise tax position.
Disclaimer
This information is for general education purposes only. It does not cover all situations and circumstances and should not be taken as direct tax advice. If you are looking for specific help, we recommend seeking guidance from a qualified tax professional.
