IRD has released an Interpretation Statement explaining the interest limitation rules for property being used to provide short stay accommodation. Short stay accommodation provided from the following is included:
- In holiday home
- In main home
- In a separate dwelling on the same land as your main home
- In a property used only to provide short stay accommodation
- On your farm or lifestyle block
Short stay accommodation in this case consists of accommodation provided to a guest for up to 4 weeks.
The interest limitation rules will apply to interest incurred on or after 1 October 2021. The specific rules according to the type of short stay accommodation are listed below:
Short Stay Accommodation provided in Holiday Home
The interest limitation rules will apply to the extent to which it is incurred for disallowed residential property(DRP). DRP is land in NZ to the extent which it has a place configured as a residence or abode. The land with the holiday home is land with a place configured as a residence and therefore it is DRP. The interest limitation rules will apply to the holiday home unless it is a new build.
Short stay accommodation provided in Main home
The interest limitation rules will not apply to the main home. Interest is deductible but may need to be apportioned and so is partially deductible.
Short Stay Accommodation in a separate dwelling on the same land as your main home
In the situation where the short stay dwelling is on the same land as your main home, interest limitation rules may apply. Whether the rules apply or not is dependent on whether you have the same loan on both the properties, separate loans and whether it is a new build.
- If you have one loan on both properties and the short stay property isn’t a new build, then the loan interest must be apportioned between the dwellings.
- If you have one loan on both properties and the short stay property IS a new build, then the loan will be apportioned between both dwellings and interest limitation rules will not apply to the interest apportioned to the short stay dwelling.
- If you have two separate loans for both dwellings and the short stay accommodation is new build, then the interest limitation rules do not apply.
Short stay dwelling on a separate property used only to provide short stay accommodation
In this situation, the property is not used for anything else and is the only property on the land, e.g., a batch used exclusively to provide short-stay accommodation.
The interest limitation rules apply to the interest incurred for your short stay dwelling unless the dwelling is new building land. The way the limitation rules will apply depends on whether the interest incurred is grandparented residential interest which means property has been acquired before 27 March 2021 and is DRP.
- If the interest incurred is grandparented residential interest, a portion will be able to be deducted during the phase out period which ends 31 March 2025
- If the interest is not grandparented residential interest, then an interest deduction will be denied
Short stay accommodation provided on your farm or lifestyle block
If you provide short-stay accommodation on your farm or lifestyle block, the first matter to consider is whether the land is farmland. This is because the interest limitation rules apply to interest to the extent to which it is incurred for DRP. The interest limitation rules do not apply to interest incurred for farmland (including interest incurred for any short stay dwelling on farmland).
Farmland is defined in the act as land that is being worked in the farming or agricultural business of the owner. It also includes land that, due to its size and nature is capable of being worked as a farming or agricultural business.
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