The Final Phase of Interest Deductibility: How to Audit Your 2026 Tax Position
- Joshua Flack
- May 30
- 3 min read
Updated: Jul 15
TL;DR
Interest deductibility is back to 100% from 1 April 2025. Most investors know the headline. Fewer have actually checked their own returns to confirm they're claiming the full amount. The phase-out years were messy, accounting systems carried partial-deductibility settings, and errors are sitting in plenty of 2025 and 2026 returns. This is a straight guide to auditing your position so you're claiming everything you're entitled to, and understanding what the change does to your year-end cash flow. The deductibility saga is over. The cleanup isn't. Between 2021 and 2025, interest deductibility on residential rentals was phased down to zero, then reversed and restored. Four years of changing percentages. Most accounting software and plenty of accountants were applying transitional rates that no longer apply.
The result: investors who assume their return is correct often aren't claiming the full 100%.
Get our Interest Deductibility and Loan Structure guide here.
What the Rule Is Now
From 1 April 2025, interest on money borrowed for residential rental property is 100% deductible again. No phase-in. No property-type distinction between new and existing. Full deductibility across the board.
That's the position for the 2025/26 tax year and onwards.
Why Errors Are Sitting in Returns
The phase-down created a mess that's still working through the system:
Accounting software set to apply 50% or 75% deductibility from earlier years
Accountants carrying forward prior-year templates
Investors who self-file using last year's logic
Mixed-purpose loans where the deductible portion was never properly recalculated
Each of these produces a return that under-claims interest. Under-claiming means you pay more tax than you owe.
The Audit: Three Checks
Check one: the deductibility percentage applied.
Pull your most recent return. Find the interest deduction. Confirm it reflects 100% of the interest paid on rental-related borrowing, not a phased-down figure.
Check two: loan purpose.
Interest is deductible based on what the borrowed money was used for, not which property secures it. If you topped up your rental loan to buy a car or fund a holiday, that portion isn't deductible. If you borrowed against your home to buy a rental, that portion is. Confirm the split is right.
Check three: the full interest figure.
Get the annual interest summary from each lender. Cross-check it against what was claimed. Gaps happen, particularly where loans were refinanced or split mid-year.
What This Does to Cash Flow
Full deductibility materially improves holding costs for negatively geared investors.
Worked example. Rental with $35,000 annual interest. Under the 0% deductibility low point, none of that reduced taxable income. Under 100% deductibility at a 33% marginal rate, that interest now shields $35,000 of income, worth roughly $11,550 in reduced tax.
That's a real cash flow difference. But remember ring-fencing still applies, so if the property runs at a loss overall, the benefit is deferred rather than immediate. (Will discuss in more detail in another post)
Where This Leaves You
If you haven't checked your return against the current 100% rule, do it. The phase-out years left errors in the system and those errors cost you money every year they go uncorrected. If you find an error, amended returns can usually recover overpaid tax for prior periods. Your accountant can action this. Most investors treat their tax return as something that happens to them once a year. It's actually a lever.
At CRISP, we look at your lending structure and how it interacts with your tax position, because the two are connected. Getting the loan structure right is what makes the deductions work.
Structure first. Deductions follow.
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(The information on this website is general in nature and does not constitute regulated financial or taxation advice. If in doubt go see your accountant. Read our 'Terms & Disclaimer' and 'Important Information About Us' before relying on any content.)
Author Bio:
Joshua Flack is a mortgage and lending adviser and the founder of Crisp Financial. Before finance, he spent two decades running businesses across construction, facilities services, and franchising, which is why his advice starts with how the numbers actually work rather than how the brochure says they should. He works with home buyers, investors, and self-employed borrowers across New Zealand, with particular depth in complex and non-standard lending. Crisp Financial Limited (FSP1012114) operates under the Link Financial Group FAP licence. The information in this article is general in nature and is not regulated financial advice.
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