depreciation recovery

[dwi.forex]

Hi,

Can someone please kindly explain how we calculate depreciation recovery ?

I have an apartment.
Say I bought the apartment for $100,000 (land + building + chattels).
Say the chattel values when I bought the apartment was $1000 (based on the chattel valuation report by ValuIt)
I have been claiming depreciation for 6 years - for total of $400
so the book/tax value of the chattels now is $600
Now I m selling my apartment INCLUDING ALL the chattels for $120,000. (land + building + chattels).

1. How do I know the LAND value at the time I bought the apartment?
2. How do I know today's LAND value ?
3. How much the depreciation recovery will be?
4. Do I need to get another valuation report?

Thank you

[drelly]

1. How do I know the LAND value at the time I bought the apartment?
Unless you specified it in the S&P, you could use the GV at the time.

2. How do I know today's LAND value ?
Same way you value it for the purchase... current GV is a good guide.

3. How much the depreciation recovery will be?
If the depreciation is recovered, it will be whatever tax you would pay on $400 income (roughly). Unless you specify that the chattels in the sale are sold at current valuation, then there is nothing recovered, is there?

4. Do I need to get another valuation report?
Ask your accountant. Not worth it for a small figure but if it's a substantial amount, then you might want to. If you're selling to a home owner, then just sell at book value.

[dwi.forex]

Thanks for the answers.

I just checked the depreciation schedule of the apartment and actually I have been claiming depreciation total of $37,000
and I am on the highest tax rate. So if I sell the apartment today,y I have to pay IRD roughly $12,000 .

To get another Valu It report, it would cost me $450 + gst.
Is it worth it? how much the new report could reduce the depreciation recovered?

[drelly]

Thanks for the answers.

I just checked the depreciation schedule of the apartment and actually I have been claiming depreciation total of $37,000
and I am on the highest tax rate. So if I sell the apartment today,y I have to pay IRD roughly $12,000 .

To get another Valu It report, it would cost me $450 + gst.
Is it worth it? how much the new report could reduce the depreciation recovered?

Unless you're selling to another investor, the buyer probably won't care if you specify the depreciated value of the chattels in the S&P, and pay no recovery. Check with your accountant but as long as you've depreciated at standard rates, then I can't imagine there would be a problem with that.

[Davo36]

Tell the valuer what you need.

And they will mostly likely provide it if it's reasonable.

[Ghouly]

I talked with a valuer the other day about this Davo at a commercial function we had (in RE myself), and he was shocked that this was happening. I told him he was a liar, and he got rather pissed off and emotional.

Great times.

[Rosco]

Thanks for the answers.

I just checked the depreciation schedule of the apartment and actually I have been claiming depreciation total of $37,000
and I am on the highest tax rate. So if I sell the apartment today,y I have to pay IRD roughly $12,000 .

To get another Valu It report, it would cost me $450 + gst.
Is it worth it? how much the new report could reduce the depreciation recovered?

Most of the $37k depreciation is likely to be on your buildings.

From your 2012 financial statements, your asset schedule should show you what the cost was of the land, building, and chattels, then how much each component has been depreciated and what the closing book value of each item is.

In some cases you are just completely out of luck, and your building has increased in value, so there might be nothing you can do. In other cases you can look at

- getting another chattels valuation done to prove that the chattels have dropped in value, and that there is no depreciation recovered on the chattels. Generally most investors are happy to go with no recovery on chattels without another chattels valuation, as the amounts are small and it makes sense that chattels have dropped in value.
- if the land is the main part that has increased, then using the new GV for the building might result in no recovery. ie if you purchased the building for $60k and depreciated by $25k to $35k. It now might only be worth $35k, so no recovery. If the GV isn't any good, then you could discuss this with a valuer, as they might value the building at a lower amount based on sales in the area.

Its a bit hard to give you advice without seeing your financial statements, and knowing the GV on the property now, but ifyou are looking at a 12k tax bill, it is worth getting some good advice on, as you might be able to save a bit.

You can also look at writing the building value into the sale and purchase agreement, but still needs to be realistic!

Ross