Moving tax implications

Question from Bella updated on 12th March 2013:

My husband and I live in London but we own an investment property in Auckland. We are up-to-date with our tax (IR3NR) and have substantial losses accumulated over the past seven years. The property is two houses on one title. We are moving back to New Zealand next year and are seriously considering moving into one of the properties for the long term (at least eight years). Can you tell me what the tax implications would be? I would assume we would stop claiming all deductible expenses associated with that property but can we still claim the other property? Also, are there implications for the losses claimed to date? We operate as a partnership.

Our expert Mark Withers responded:

When a taxpayer moves back into a property that has previously been rented, a deemed disposal from the tax base is triggered at market value. Where the market value of the building exceeds its book value, a depreciation recovery is triggered. This recovery is deemed to occur on the first day of the income year after the year you move back in. It is likely that a significant portion of the losses you have accumulated will be as a result of claiming depreciation on the building. Assuming a full recovery is triggered on the dwelling you move back into this recovery income will be offset against the losses being carried forward. No further deduction for expenses is available once the dwelling you intend moving into is no longer available for rent. It essentially becomes a private asset from that point on. You can still continue to claim costs associated with earning the rent from the other dwelling, costs like rates will probably need to be apportioned, perhaps using the ratio of size of the respective dwellings. If you have not split the depreciation between the two buildings an apportionment of this will also have to be made to calculate the extent of the depreciation recovery.

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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