Deducting interest on buy-to-let mortgages from capital gains

The Tax Administration receives information about mortgages and interest from banks. The information is shown in taxpayers’ pre-completed tax returns. Buy-to-let mortgages are not the same as residential mortgages and are instead treated as income generation loans.

Interest on income generation loans can be deducted from capital gains accrued from buy-to-let properties. Other related costs, such as mortgage fees, can also be deducted.

1

CHECK YOUR INFORMATION

Check that the intended purpose of the loan is entered correctly in your pre-completed tax return.

2

EDIT YOUR INFORMATION

If the information contained in your pre-completed tax return is incorrect or incomplete, make the necessary corrections in one of the following ways:

  • Log into Tax Return on the Web when the service is available.
  • Make corrections to the section on interest on income generation loans in your pre-completed tax return.

You cannot deduct interest from your gross rental income as part of charges and other expenses on Form 7H or 7K.

Interest and expenses in excess of capital gains

Interest costs of individuals and estates are primarily deducted from capital gains.

If there are not enough capital gains to make deductions, there is a deficit. This can occur, for example, if the amount of interest on a loan exceeds the amount of capital gains.

Calculating capital gains deficits:

Capital gains
— expenses from earning an income
— losses from the source of income
— interest
 = deficit (if negative)

A deficit credit of 30% is deducted from income tax. The percentage is the same as the capital gains tax rate.

If the amount of income tax payable is not high enough to deduct the deficit (i.e. to apply a deficit credit), a capital loss is recorded. The Tax Administration then deducts the capital loss from capital gains accrued over the following 10 tax years as and when capital gains accumulate.

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