Claiming depreciation

Question from john updated on 28th May 2010:

Hi, my question relates to claiming depreciation for a investment property currently being rented, and is in two parts-firstly I have purchased ($575000) an investment property in Queenstown, and trying to work out the depreciation rate I can claim back on tax. It was built in 1996, 3bed 2bath residential freestanding home, 196 sqm and detached garage 46 sqm. Secondly, if I claim depreciation on my tax return, further down the track (i.e.- years to come) if I sell the property do I have to pay back what has been claimed in depreciation to IR as a form of capital gains tax (or other kind of tax)?? working on the current laws of today! I appreciate your assistance- regards John

Our expert Mark Withers responded:

Dear John, your property acquisition will consist of land, buildings and chattels. Only the cost of the buildings and chattels can be depreciated. A chattel can only be depreciated seperately from the building if it is "capable of physical or functional seperation" from the building. The split between land and building is determined by applying the ratio of land to building from either your CV or an independant valuers report. Once the cost of the depreciable assets has been thus determined you have a choice of either applying the straight line or diminishing value rates to the respective assets to actually determine the depreciation deduction.

If ultimately the value of the assets rises and you dispose of them literally ( by selling them) or figeratively ( by ceasing to rent them) the depreciation must be recovered by adding it back into the tax return as income. This is simply because no depreciation had actually occured if the assets rise in value. This is the reason why depreciation claims only really provide a timing difference with the tax if you experience capital growth. Having said that, the depreciation claim is also a very important "hedge" against the possibility that the assets could drop in value.....just talk to taxpayers with leaky buildings.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.


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