The cost of selling

[makanlah]

Hi folks, I never usually sell a property, but last year I sold a Pukekohe unit (basic brick 2-bedder) I'd held for 11 years. Was a little astonished at how much I have to pay the taxman, can anyone tell me if this looks about right? Bought for $160,000, sold for $360,000... Have to pay back depreciation claimed over the years of over $33,000.

[makanlah]

Update: accountant made a mistake. Should have put tax on depreciation. That is only around $5000. Not the usual person who handles my returns.

[HattrickNZ]

How did u come to that figure? Accountant? Am no expert on this but maybe u over depreciated, therfore you have to PA the difference.

[Rosco]

quick guess of numbers

purchased $160k
so maybe 80k building
2004 first year
to 2011 last year of building depreciation

So 7 years of depreciation, if straight line was 3% for most of period, so 2400 per year, *7 years = $16,800 approx.

So your $33,000 sounds a bit high!

If you have depreciated chattels, generally you wouldn't recover depreciation on these, as they do wear out. So should just be recovery on the building depreciation claimed.

Ross

[Wayne]

So 7 years of depreciation, if straight line was 3% for most of period, so 2400 per year, *7 years = $16,800 approx.

So the tax on the $17k at $5k sounds about right.

Update: accountant made a mistake. Should have put tax on depreciation. That is only around $5000. Not the usual person who handles my returns.

[Rosco]

33,000 at 17.5% tax is also around $5k. so the depreciation recovery could still be wrong!

Ross

[Wayne]

Could be - not enough info really.
Hard to say if the person needs a better accountant or needs to be more in tune with what is happening.

[makanlah]

Could be - not enough info really.
Hard to say if the person needs a better accountant or needs to be more in tune with what is happening.

Hey, cut me some slack here Wayne. I've suffered a terrible bereavement. I bought the property for my daughter when she was aged six. I figured it would eventually be paid off and could fund her Uni fees or be a deposit on a house, or give her more options in life..and would be passed onto her. Unfortunately my only child died tragically last year. aged 17. It's not easy to function after something like this in any way, and you kinda hope the experts you hire can do their job. My accountant is pretty good but this year a newbie in the office did the return....as I later found out. AnywY thanks all, particularly Rosco, for your help. Incidentally10 months after I sold, 2bed units there are now going for up to $80,000 more. My only consolation is that not knowing what to do with the proceeds, I just dumped them in a U.S. Dollar term deposit, which has grown a bit.

[Wayne]

Sorry to hear of the bereavements and the comment wasn't meant to sound 'harsh'.
You do expect to be able to trust the experts you pay for but I have found I need to know enough to give everything a 'sniff test'.
You know the questions to ask your accountant now - mainly around what depreciation is being recovered (house or chattels).

[klauster]

Check with your accountant:
Amount depends on claimed rate (SL 2%) or (DV 3%) and building value.

Guessing by 80k building - it looks too high to me as the book value of 80k shrunk by approx. 17k depreciation

= would estimate around 3k,

But the 5k could also be the result of a higher building value (120k)???

[Anthonyacat]

The cost of depreciation recovery on the sale of a property is often quite a shock. But a good accountant would have discussed with you when you bought the property that in almost every case, claiming depreciation on buildings is just a timing thing. It's effectively an interest-free loan from the IRD, that you pay back when you sell the place.

It won't be a problem for properties purchased in the last few years, because IRD now refuse to let you claim it in the first place!

[klauster]

The cost of depreciation recovery on the sale of a property is often quite a shock. But a good accountant would have discussed with you when you bought the property that in almost every case, claiming depreciation on buildings is just a timing thing. It's effectively an interest-free loan from the IRD, that you pay back when you sell the place.

It won't be a problem for properties purchased in the last few years, because IRD now refuse to let you claim it in the first place!

Depreciation is to compensate for wear and tear – let me say to keep a building in working order for its life span. The phenomenon with housing is despite of depreciating, think of a 25 years old tin roof, that house with such rusty roof will still be sold above the purchase price (or better book value). A simple reason for depreciation recovery, really.

Removing the depreciation from rental housing actually means - no wear and tear and rusty, leaky roofs have the same value as new once. Keeping a house in good working order costs nothing.

[Wayne]

It's the land that goes up in value

[PC]

Keeping a house in good order costs a great deal.
Depreciation used to offset these considerable costs.

So now a days - the rent has to go up more to pay, the home owner takes a bigger hit or the maintenance doesn't happen.
In reality - a combination of all three.

Even with great capital gains - cash flow will make or break you.

[klauster]

It's the land that goes up in value

Right – rate assessments outlining land and building value.

Now, with zero depreciation the book value is equal to the initial purchase price. If the house sells above the purchase price the next owner has a house with a higher “value”, right?

The problem here is to distinguish the reasons for the increase in value. Was it capital gain (just increased market value) or because that house has been upgraded (central heating, double glazing, new bath and kitchen) based on replacement value?

If “capital gain” would be treated as taxable income, my expectation would be that “all” improvements made on a house to be taken off the capital gain in the same way as developers can claim their building costs.