Depreciation recovery when landlords move into rentals

Question from Nonny updated on 3rd December 2010:

What are the tax implications if we move into our rental propery and rent out my current home and how can we minimise tax payments? We are looking at moving into our 6 year old rental property and renting out our current home instead. Our current rental has been depreciated as per IRD schedule and the mortgage was taken out to generate rental income. How do I need to structure the change and inform the IRD?

Our expert Mark Withers responded:

If you move into a rental property you trigger a deemed disposal of it from the tax base. This means it is deemed to be sold at market value. If market value exceeds depreciated book value a depreciation recovery is likely to be triggered. This income is added to the first day of the next income tax year. All the costs associated with the rental property become non deductible at the point it is no longer available for rent. This includes interest on the bank loan.

Conversely, the rent derived from the old family home becomes assessable and costs deductible from the point it is available for rent. If you have equity in the old family home and debt funding the old rental property your equity will be in the wrong property to be tax effective. You may wish to contemplate a restructure but should be concious that if a restructure is purely tax driven it can be considered tax avoidance. You may well like to consider reviewing your entire estate plan in conjunction with any tax structure changes to ensure a wider agenda is considered.

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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