Question from Eugene updated on 14th March 2018:
After 12+ years and a number of tenants the kitchen in our property was in such poor condition that the only (and the cheapest) way to repair it was to replace all the cabinets, benchtops, etc completely. So I did and it cost me about $3,300. This includes materials only; I did all the job myself and so I’m not claiming any labour. From IRD notes I understand that I can claim $3,300 as a repair cost.
The old kitchen was valued at $6,800 back in 2004 (all figures are rounded) and depreciated until 2011. From 2012 the IRD rules changed and the kitchen is considered to be part of the building, so the depreciation rate became 0 but 'fitted furniture' still appears as a separate record in our book with current value of $3,000.
How do I correctly account for the old kitchen, taking into account that it no longer physically exists? Should I exclude the record from our book and so effectively reduce the 'building' value by $6,800? Should I claim the remaining $3,000 as loss on disposal?
Our expert Mark Withers responded:
The IRD’s current policy is, as you say, that the kitchen is considered part of the building as the building is not complete without a kitchen and so its replacement is a repair to the building. However, it is complicated because you have the original kitchen recorded separately and depreciated.
There are really two transactions:
Transaction 1. Disposal of the old kitchen for zero dollars
Transaction 2. Repair the building by building a new kitchen.
Given IRD now consider the kitchen to be part of the building and there is a specific rule that losses on disposal of buildings are non-deductible I fear you will get no deduction for the write off of the book value of the old kitchen.
I would though expense the new one as a repair to the building so you are getting an all up deduction for the $3300 new kitchen - but no write off for the old, simply because its “ part of the building” not a separate asset even though you originally depreciated it as such.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.