To depreciate or not?

Question from Liz updated on 18th November 2010:

I don't feel I know enough about this to decide if I want to claim depreciation on my home that is now being rented or not. What are the disadvantages and pitfalls of doing so and what are the benifits? I may decide to sell in the next 5 years.

Our expert Mark Withers responded:

*This answer was correct at time of answering, 8th August, 2010

The decision may well be taken away from you given this government seems hell bent on removing depreciation on buildings. For now though you should understand that if you choose not to depreciate you must make a written election with IRD. This election is non revocable, ie you can't change your mind. The election is important because without it the IRD can actually require you to recover the depreciation you should have claimed! Strange but true.

I'd usually suggest you do claim because it is a hedge aganst the possibility that the property could fall in value and there is no deduction for losses on disposal of buildings if it did ultimately depreciate. Also there is time value of money theory which says take the saving today because todays dollar is worth more than the dollar you repay tomorrow on recovery. Also, if tax rates start falling you may save tax at a higher tax rate today than the tax rate you will face when the recovery is triggered on disposal. 

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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