Rental income tax in NZ: interest, ring-fencing and bright-line

Rental income is not taxed separately. Your net rental profit is added to your salary and other income and taxed at your marginal rate, and you file an IR3 to report it. For the 2026/27 tax year, mortgage interest on residential rentals is 100% deductible, up from 80% in 2024/25. Losses on residential property are ring-fenced: they cannot reduce tax on your salary, only future rental profits. And if you sell within 2 years, the bright-line test can tax the gain.

How rental income is taxed

This guide is general information about how the rules work, not tax advice for your situation. Property tax has many edge cases, so check Inland Revenue's IR264 Rental income guide (March 2026) or talk to a tax adviser before you rely on it.

If you own a rental in your own name, the rent you receive less your allowable expenses is your net rental income. It goes into your taxable income for the year alongside wages, interest and anything else, and is taxed at the same marginal rates. There is no separate rental tax rate.

Because no tax is deducted from rent as it comes in, individual owners report it on an IR3 return. On the 2026 IR3, residential rental income and deductions go in Question 22, where the ring-fencing rules apply. Properties excluded from those rules, such as a main home, a mixed-use holiday home or certain employee accommodation, and commercial rentals go in Question 23.

Rent is not liable for the ACC earners' levy, so the only tax on it is income tax.

Which properties the residential rules cover matters more than it sounds. The ring-fencing rules and the interest rules both apply to residential rentals. A main home, a mixed-use holiday home and certain employee accommodation are excluded from ring-fencing, and land held on revenue account is partly excluded. Commercial rentals are reported separately from residential ones. If you are not sure which side of the line a property falls on, IR264 sets out the tests.

Worked example: salary, interest and a rental

Say you earn $70,000 in salary in 2026/27, $3,000 of bank interest with RWT taken at 10.5%, and your rental makes a net profit of $8,000 after expenses. This site's engine gives:

Without the rental, the same salary and interest would leave $585.02 to pay, all of it because the RWT rate on the interest is too low. The rental profit adds $2,487.00 to the bill. Tax on $70,000 alone is $13,220.50, so the extra $11,000 of interest and rent carries $3,387.00 of tax. The rental profit takes your income past $78,100, so part of it is taxed at 33%. Your marginal rate is now 33%, while your effective rate on the whole $81,000 is 20.5%.

Two things follow. First, at $81,000 your RWT rate should be 33%, not 10.5%; at 33% the bank would have taken $990.00 and the bill would be smaller. Run through the engine with RWT at 33%, the year ends with $2,397.02 to pay instead of $3,072.02. Our RWT guide explains how to choose. Second, you pay provisional tax the following year if your residual income tax is more than $5,000. At $3,072.02 this example is under that line, but a bigger rental profit could cross it; see our provisional tax guide.

Deductions and mortgage interest

You can deduct the costs of earning the rent, provided they meet the general deductibility rules and are not private. IR264 is Inland Revenue's guide to what qualifies. Mortgage interest is the one with its own timeline, under the residential property interest limitation rules:

New builds, land businesses and property development have their own exemptions, and a main home is generally outside the rules.

To see what the change means, take a rental with $30,000 of rent, $15,000 of mortgage interest and $7,000 of other deductible costs, owned by someone on a $70,000 salary:

The 2024/25 figure uses that year's composite tax rates, which blend the old and new brackets because the thresholds changed on 31 July 2024. On 2026/27 rates alone, the same rental at 80% would carry $3,387.00 of tax, so full deductibility is worth $987.00 a year to this owner.

Ring-fencing: why a rental loss does not cut your salary tax

Since the 2019/20 income year, the residential property deduction rules limit your residential rental deductions to your residential rental income for the year. If your deductions are higher, the excess is not lost. It is carried forward to a later year in which you have residential income to use it against.

Here is what that means in 2026/27 for someone on $70,000 whose rental takes in $20,000 and has $26,000 of deductions. The $6,000 loss is carried forward. Tax on the salary stays at $13,220.50; if the loss could be used, it would be $11,420.50. Ring-fencing holds back that $1,800.00 until there is rental profit to absorb the loss.

The carried-forward amount is not wasted. If the property makes a profit in a later year, say because rents rise or the mortgage shrinks, the $6,000 of carried-forward deductions is used against that profit, and there is no tax on the rental until it is used up. Keep a clear record of the amount carried forward each year, because you will need it for each return.

You choose how to apply the rules:

• Portfolio basis: all your residential rentals are pooled. Once you use the portfolio basis you cannot switch back.
• Individual property basis: each property stands alone.

Inland Revenue's IR264 examples show how it works. They are not tied to a particular tax year:

Jairus shows the way out. Excess deductions are released against other income only when an individual property, or the last property in a portfolio where every sale was taxable, is sold in a taxable sale.

Selling: the 2-year bright-line test

Under Inland Revenue's bright-line property rule, for residential property sold on or after 1 July 2024, any profit is taxable if you sell within 2 years.

• The clock starts on the bright-line start date, usually the date the title transfers to you.
• The clock stops on the bright-line end date, usually the date you enter a binding sale agreement.
• Usually excluded: a main home that meets the criteria, inherited property and relationship property transfers. Rollover relief applies to some transfers.

To see how the dates work: if title to a property transferred to you on 1 August 2025, a binding sale agreement signed before 1 August 2027 falls inside the 2 years, and the profit is taxable. Sign later than that and the bright-line test does not catch the sale.

Sales before 1 July 2024 used longer bright-line periods, so an older sale may be under different rules.

Two connections to the rental rules: interest you could not deduct is added to the property's cost on a taxable bright-line sale, which reduces the taxable gain. And a bright-line loss is not included in your return; it is carried forward against future taxable land sale income.

Holiday homes and part-time rentals

A bach or holiday home that you use yourself and also rent out is treated differently. If it is used privately, used to earn income, and sits unused for 62 days or more in the year, the mixed-use asset rules apply. They split expenses between private use and income-earning use, so you deduct only the income share.

Mixed-use holiday homes are among the properties excluded from ring-fencing, which is why they go in Question 23 of the IR3, not Question 22. IR264 covers the apportionment in detail.

Filing and paying for 2026/27

The 2026/27 tax year runs from 1 April 2026 to 31 March 2027. For that year:

You have to file an IR3 if you received more than $200 of income Inland Revenue has not been told about, and net rental income is the classic example. Our guide to who files an IR3 covers the rest. To see how a rental changes your tax, add your net rental income in the annual tax calculator.

Questions people ask

What tax rate applies to rental income in NZ?

There is no separate rate. Net rental income is added to your other income and taxed at your marginal rates: for 2026/27, from 10.5% up to 39% on income over $180,000.

Can I deduct all my mortgage interest in 2026/27?

For NZ residential rentals, interest is 100% deductible from 1 April 2025, provided it meets the general deductibility rules and is not private. It was 80% in 2024/25.

Can I offset a rental loss against my salary?

Not for residential property. The loss is ring-fenced and carried forward against future residential income. It is released against other income only on certain taxable sales.

How long is the bright-line period?

2 years for residential property sold on or after 1 July 2024, usually measured from when title transfers to you to when you sign a binding sale agreement.