On shaky ground

Question from Jo updated on 29th July 2011:

I have a friend who has a rental property in Christchurch which will need to be demolished as a ressult of the September quake, and she will recieve payment to replace the dwelling. She has been advised by the IRD that because she is replacing an existing dwelling she will need to repay the depreciation she has claimed on the property over the years as the construction of a new dwelling is treated like a sale of the property. (I think businesses will also be treated the same way if they have to rebuild). Given the circumstances this seems quite harsh - is this a correct interpretation?

Our expert Mark Withers responded:

On 16 March 2011 the Minister of Revenue Peter Dunne issuesd a press release advising that he is working on a number of tax initiatives designed to bring relief to those effected by the Quake, this is to include depreciation issues including clawback of depreciation from the insurance proceeds on destroyed buildings so I guess we watch this space for developments.

Also be aware that section EE47 allows as a deduction a loss on disposal of a building in the event that it is irreparably damaged by fire or natural disaster. This could arise if the insurance proceeds fall short of the book value of the building. This section is important because in other circumstances the loss on disposal of a building is not deductible.

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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