Depreciation clawback on rental which is now PPOR

[Evil]

Hi people,
I bought my house about 6 yrs ago and rented my house out for about 4 yrs while I lived with my parents. I then moved into my house with 3 others for about a year and so claimed 3/4 of the possible depreciation on building+chattels+expenses. Now there is only me and my girlfriend living in the house since the beginning of last year.

As I understand it I have to now pay back the depreciation claimed as I havn't had more than 2 boarders for this year.

My question is do I only pay back what I've actually claimed (3/4 of total depreciation) OR the difference between the present and starting book value of the building? (eg pay back 1/4 more than I've actually claimed)

This question would also apply to holiday homes where you claim a percentage of the depreciation and expenses if you live in them for the holidays and rent them out for the rest of the year.

thanks
Glen

[drelly]

You pay back the TAX that you would have paid on the amount of depreciation claimed.

ie;
Tax rate = 33%
Total depreciation: $30k
Tax to pay: $10k

I have got this right haven't I? It's late... someone pls confirm...

[Warren]

Evil,

While it has just been you and your partner you are not able to claim depreciation. If you have you will need to repay the tax on the amount claimed during the time you have not had boarders - so your understanding is correct.

Partial depreciation claims like this, holiday homes and home offices can get very very messy. We strongly recommend that you need to take direction from your accountant/ tax advisor, as they will all treat it differently!

Regards

[Evil]

Thanks guys for the replies.

You pay back the TAX that you would have paid on the amount of depreciation claimed.

Yeah I realise I pay the tax of the amount....but do I pay the tax on the amount claimed (3/4 of depreciated value) or on the difference between the starting and ending book values (full depreciated value).

In the IR 264 booklet it says
"If you sell an asset for more than its adjusted tax value, you will have to
include the difference between the sale price and the adjusted tax value in
your taxable income."

So is the "adjusted tax value" what I've actually claimed or is it the latest book value?

While it has just been you and your partner you are not able to claim depreciation. If you have you will need to repay the tax on the amount claimed during the time you have not had boarders

No I havn't claimed depreciation while it was just me and my partner....only when I had 3 boarders. But since I was living there as well I could only claim 3/4.

Glen

[masteraccountants]

Hi,

I am pasting below an extract from the NZ Master Tax Guide paragraph 13-150.

"Where depreciable property is disposed of for a consideration which is greater than its adjusted tax value, the lesser of the excess and the aggregate of all depreciation deductions allowed in respect of the property is included as gross income. "

The extract mentions the LESSER of the two. The first is the excess of the original purchase cost over the written down value. The second is the depreciation deductions allowed over time for the property.

As the accumulated depreciation deductions allowed are less that the first calculation, you only need to base your depreciation recovered on the depreciation claims actually made, ie the proportions claimed.

I find it interesting to ask if you used an accountant to assist you in your tax return?

Throughout the whole time of ownership, it appears that you have had less than 5 boarders. There is a rule that allows you to only record as net rental income 20% of the rent collected when between 2-4 boarders. This means not having to bother keeping a lot of records and effectively claiming 80% expenses - and no depreciation recovered issues. Where you have 1 boarder, there is no need to show the income at all.

If your taxation deductions have been less than 80%, you have wasted your time and paid more tax than necessary.

If you used an accountant, and they did not mention or explore this option, I would ask them why not. I don't like doing more work than what I have to, especially if I am charging a client. And I know that I am duty bound to act in my clients' interests. That includes saving them tax and accounting fees.

[Evil]

Hey Christopher,

I do my own tax returns with the help of my Mum who owns 3 rentals.
I thought she knew what she was doing until I read the book "Property Tax" and started my "education" journey into property. I now know that if she got audited she would probably be screwed.
So I plan to see an accountant before the financial year is up to make sure everything is in order.

If your taxation deductions have been less than 80%, you have wasted your time and paid more tax than necessary.

I actually got a tax refund last year. As my expenses were greater than the board I received.
The IR264 booklet says
"If you think that the profit you make from boarders will be less than
20% of the total board payments you receive, you can choose to keep
full records of all your household expenses, and work out the proportion
of the expenses relating to the boarders.You can then deduct these costs of having boarders from the total board payments you receive, and include only the remaining profit in your tax return."


Was I correct in claiming 3/4 of interest and building+chattel depreciation as expenses relating to the boarders?

thanks
Glen

[masteraccountants]

Hi Glen,

Yes you were correct in claiming 3/4 of all expenses including depreciation.

Now that you have to pay back depreciation recovered, you ight have to pay back the tax refund that you received.

You may still have been better off through claiming depreciation as it is an interest-free loan.

[Evil]

Cool, thanks for clearing that up for me Christopher

Glen