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Income Tax Act 2007

Deductions - Interest incurred in relation to certain land

DH 7: Grandparented residential interest

You could also call this:

“Interest on certain loans for residential property”

Grandparented residential interest is a type of interest that applies to you if you have a special kind of loan called a grandparented transitional loan. This interest can be one of two things:

It can be interest on the main part of your loan that you use for disallowed residential property. Disallowed residential property is a specific kind of property defined in the law.

If your loan is for both disallowed residential property and allowed property, and you can’t easily figure out how much is for each, there’s a special way to work it out. You pretend you took out a loan on 26 March 2021 just for the disallowed residential property. The amount of this pretend loan is worked out using a special calculation.

To figure out this pretend loan amount, you use a formula: outstanding borrowings minus allowed property. If the answer is less than zero, you treat it as zero.

In this formula, ‘outstanding borrowings’ means how much of your real loan was for both disallowed residential property and allowed property on 26 March 2021. ‘Allowed property’ means the value of your things that aren’t disallowed residential property and that you use to earn income. It also includes some types of disallowed residential property described in section DH 4.

When you pay back your real loan, it reduces your pretend loan amount too, but not below zero. If you sell allowed property to make the repayment, only the extra amount above what the allowed property was worth on 26 March 2021 reduces your pretend loan amount.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=LMS675464.

Topics:
Money and consumer rights > Taxes
Housing and property > Buying and selling homes
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Part D Deductions
Interest incurred in relation to certain land

DH 7Grandparented residential interest

  1. Grandparented residential interest means interest, for a person and a grandparented transitional loan, that is,—

  2. interest for the loan’s principal to the extent to which the interest is incurred for disallowed residential property:
    1. if the loan (the underlying loan) is for both disallowed residential property and property that is allowed property described in subsection (3)(b), and the portion incurred for disallowed residential property cannot reasonably be determined, the portion of underlying interest calculated by reference to a notional loan principal (the notional loan principal) that the person is treated as having used to acquire, on 26 March 2021, the disallowed residential property to which the underlying loan relates. The initial notional loan principal is calculated using the formula in subsection (2) and the treatment of repayments is provided in subsection (4).

      1. For the purpose of subsection (1)(b), the notional loan principal is calculated using the following formula, treating a negative amount as zero:

        outstanding borrowings − allowed property.

        Where:

        • In the formula in subsection (2),—

        • outstanding borrowings is the principal of the underlying loan, determined as at 26 March 2021, to the extent to which it is for both disallowed residential property and property that is allowed property described in paragraph (b):
          1. allowed property is the total of—
            1. the value of the person’s assets, determined as at 26 March 2021, that is not disallowed residential property, but ignoring assets that are not used in deriving assessable income; and
              1. to the extent to which the person’s assets are disallowed residential property described in section DH 4, the value of those assets, determined as at 26 March 2021.

              2. A repayment of the underlying loan is applied against the notional loan principal to reduce it, to a minimum of zero, unless the source of the repayment is the disposal of allowed property described in subsection (3)(b). If the source of the repayment is the disposal of allowed property, then only the amount of the repayment that is in excess of the 26 March 2021 value of the allowed property is applied against the notional loan principal to reduce it, to a minimum of zero.

              Notes
              • Section DH 7: inserted (with effect on 27 March 2021), on , by section 75 of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
              • Section DH 7(2) heading: amended (with effect on 27 March 2021), on , by section 44 of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (2023 No 5).