Reducing Depreciation clawback

[spaceman]

I'm about to sell a property for more than I paid for it ........ in the past I have heard about people nominating the split between the land & improvements price on the S&P agreement ...... how legit is this????

In my case I would like the land value to be as high as possible and the improvements (house) to be as low as possible in order to reduce the amount of depreciation that is clawed back. ....... the house IMHO isn't worth what is stated on the CV as I've checked on the interwebz and I could get a brand new signature home for less ...... ipso facto the land is worth more.

As long as I don't go all stupid and split the value 99% land & 1% improvements can I put what I want on the S&P????

Cheers
Spaceman

[drelly]

I think it depends on the property. In some cases, it's absolutely legit. If you have a high capital growth area, then most of the increase probably is in the land. Combine that with a deteriorating building and you might be able to get it all back. A valuation could be useful if you want to cover your arse!

[jedimaster]

Just draft a clause with the building price and chattels in a list stating they are being sold for their depreciated book value, with the remainder of the sale price being the land component.

[Rosco]

I can't believe I'm hearing this from you !! "how legit is this????"

It does depend a lot on the fair market value of the building, and what your values are in the books.

It is possible that the land has jumped in value, and the building has decreased slightly. But if you have had good capital gain overall, I'd make sure you have something good to support this with. So for safety I would get a valuation to prove the low building value.

You can write a building value in the sale and purchase agreement, but you would want this to be reasonable realistic or close to the valuation. If this is a related party sale, the value in the sale and purchase agreement won't work because its not an arms length transaction.

Ross

[spaceman]

LOLZ .... legit.... I was kinda hoping somebody would bust out some MC Hammer

I'd heard of this being done but it sounded in the past a bit "urban mythy" to me the way it was done ....... fair enough if you had a valuation but pretty dodgey if you did it the way I heard of it being done ..... jedimaster's approach seems reasonable as long as that didn't make the land value stupidly high.

I'm all about paying as little tax as I have to, but legitimately.... a registered valuation seems to be the way ....... though I think I'd be pretty keen to argue the case if the valuer comes close to the same figures as the CV.

CV = $455K ... Land = $180 thus house = $275K ..... which IMHO is just stupid when you take into account a brand new home from Signature about the same sq/m can be got for $220k-$243 or Jennian who have more than 20 for sale in the $0 - $250K range......makes it pretty silly to argue that the early 80's place I'm selling is worth more

MEH.............sounds like it's just best for me to stump up for a valuation and an exit depreciation schedule........... though truth be told I was hoping to hear from somebody who'd been there done that and managed to minimise the depreciation clawback .

Cheers
Spaceman

[One]

Hmmm. The "GV minus land" component is the value of the "improvements", or anyway it is here in ChCh. Does that mean it includes garage, garden shed, driveway and paths, landscaping, and services from boundary to buildings?

Those could be worth a lot of tens of thousands. They're also not normally included in the build price from building companies. Other than the garage.

[spaceman]

^ I think you're a bit discombobulated there One ...... the land price is the land price unimproved .....improvements make up the rest of the value, mostly this is the house but can also refer to other stuff as you've noted

Cheers
spaceman

[One]

Yeah, so you'd need to add 10-20% to the cost of the Jennian/Signature house to start comparing apples with apples.

Still looks like less than your 80s place but not as much less.

[spaceman]

HAH!!!!!..... I was the one who was discombobulated

See what I did there?????

Cheers
Spaceman

[jedimaster]

LOLZ .... legit.... I was kinda hoping somebody would bust out some MC Hammer

I'd heard of this being done but it sounded in the past a bit "urban mythy" to me the way it was done ....... fair enough if you had a valuation but pretty dodgey if you did it the way I heard of it being done ..... jedimaster's approach seems reasonable as long as that didn't make the land value stupidly high.

I'm all about paying as little tax as I have to, but legitimately.... a registered valuation seems to be the way ....... though I think I'd be pretty keen to argue the case if the valuer comes close to the same figures as the CV.

CV = $455K ... Land = $180 thus house = $275K ..... which IMHO is just stupid when you take into account a brand new home from Signature about the same sq/m can be got for $220k-$243 or Jennian who have more than 20 for sale in the $0 - $250K range......makes it pretty silly to argue that the early 80's place I'm selling is worth more

MEH.............sounds like it's just best for me to stump up for a valuation and an exit depreciation schedule........... though truth be told I was hoping to hear from somebody who'd been there done that and managed to minimise the depreciation clawback .

Cheers
Spaceman

The thinkg you have to take into account is if IRD ever had a crack at it, you have a transaction between two unrelated parties at arms length. Obviously dodgy in a related party transaction

[Rosco]

LOLZ .... legit.... I was kinda hoping somebody would bust out some MC Hammer

I'd heard of this being done but it sounded in the past a bit "urban mythy" to me the way it was done ....... fair enough if you had a valuation but pretty dodgey if you did it the way I heard of it being done ..... jedimaster's approach seems reasonable as long as that didn't make the land value stupidly high.

I'm all about paying as little tax as I have to, but legitimately.... a registered valuation seems to be the way ....... though I think I'd be pretty keen to argue the case if the valuer comes close to the same figures as the CV.

CV = $455K ... Land = $180 thus house = $275K ..... which IMHO is just stupid when you take into account a brand new home from Signature about the same sq/m can be got for $220k-$243 or Jennian who have more than 20 for sale in the $0 - $250K range......makes it pretty silly to argue that the early 80's place I'm selling is worth more

MEH.............sounds like it's just best for me to stump up for a valuation and an exit depreciation schedule........... though truth be told I was hoping to hear from somebody who'd been there done that and managed to minimise the depreciation clawback .

Cheers
Spaceman

Hi Spaceman,

If you wrote $275k building value in the sale and purchase agreement. Obviously no problem.

If you put $250k, obviously still quite realistic.

If you put $50k, obviously not realistic, and if this created a large tax advantage IRD would rightly argue that this is tax avoidance.

The technical arguement is that if you are selling to a non related party, at arms length, then the value on the sale and purchase agreement is what it is worth. But the buyer doesn't really care what the building value is (especially as can't depreciate now) so if the values are too far stretched, then becomes tax avoidance.

We have used building values in the sale and purchase agreements at lot over last 10 or so years, but have kept realistic. So can go above or below valuation or QV figure, but still within reason. For clients where land has obviously jumped, or where building has obviously dropped we have obtained valuations as the starting point, then gone slightly above/below this, so that there is something to back up or support the sale/purchase agreement.

Ross

[DeanAshby]

Yup, go get a CV first and just state down the values that you deem are fit for both the land and the house. I think it is reasonable because houses do deteriorate over time and thus decreasing its value. As for the land, it has to obviously still remain in good condition, along with the garden, pathway and any other storage areas.