Query re clawback tax.

[Sandie]

Can someone please advise me about depreciation clawback? I inherited a rental property in 1987 and since then have claimed depreciation on it. I am thinking about putting it into a trust and understand that in doing this I would be liable for depreciation clawback if the value of the property is now higher than it was when I inherited it. I would appreciate some advice about this and particularly the kind of valuation that would be needed.

I look forward to other members response.

Sandie

[Wayne]

Talk to an accountant as you'd need to know just what you have claimed depreciation on (chattels and house (till you couldn't do that bit)), how much and what the value could be shown at now.
Chattels you might get away with no clawback but the house is probably worth more now than the book value so you'd probably have to pay.

[Anthonyacat]

From 1987 you're likely to be recovering 100% of building depreciation, unless the building is in a truly dismal state.

The kind of valuation doesn't really matter for the purposes of the transfer. No matter what valuation you use, you'll likely have the same amount depreciation to repay. May as well use the rates valuation, a free valuation from a local real estate agent, or the free estimate valuation provided by Homes.co.nz or Trademe Insights.


Basically, as your accountant back in the 80s should have informed you, the depreciation charge on a building was basically an interest free loan from the IRD. You get lower tax bills each year while you own the property, then pay it all back when it's sold, barring a major market meltdown where you make a loss on the property.

As an incredibly vague estimate/example of your tax bill, I'll imagine you inherited a property worth $100,000 in 1987, of which $50k was land and $50k was buildings. You'd have depreciated the building at 3% straight line for 25 years (to 2011 when depreciation was removed) claiming $37.5k of depreciation, saving you $X in tax. You now sell the property for $800k, so have to declare that $37.5k as income, and pay tax at today's rates, up to $12.5k in the top tax bracket.

[Bobsyouruncle]

Talk to someone like GRA about this, you can absolutely minimise it.

[Anthonyacat]

... Not after 30 years of capital growth you can't. There's no earthly way the building could be considered to be worth less now than it was in 1987.

There were all sorts of valuation intricacies you could use to weight the sale price towards land, but the effectiveness rapidly decreases over time. I'd argue that most properties in the major cities bought before 2011 would struggle to recover less than 100% of the depreciation.

But Sandie, if you do go to GRA or wherever else and they help you pay less than 100% of the building depreciation back, come back here and let us know!

[Sandie]

Thank you so much for the advice.

Re Anthonyacat's request for me to come back and let you know the result. I certainly will, but it may take me a while. That is because as part of the exercise I need to review my will and also set up a trust.

Thanks again.

Kind regards
Sandie

[SimonW]

From 1987 you're likely to be recovering 100% of building depreciation, unless the building is in a truly dismal state.

The kind of valuation doesn't really matter for the purposes of the transfer. No matter what valuation you use, you'll likely have the same amount depreciation to repay. May as well use the rates valuation, a free valuation from a local real estate agent, or the free estimate valuation provided by Homes.co.nz or Trademe Insights.


Basically, as your accountant back in the 80s should have informed you, the depreciation charge on a building was basically an interest free loan from the IRD. You get lower tax bills each year while you own the property, then pay it all back when it's sold, barring a major market meltdown where you make a loss on the property.

As an incredibly vague estimate/example of your tax bill, I'll imagine you inherited a property worth $100,000 in 1987, of which $50k was land and $50k was buildings. You'd have depreciated the building at 3% straight line for 25 years (to 2011 when depreciation was removed) claiming $37.5k of depreciation, saving you $X in tax. You now sell the property for $800k, so have to declare that $37.5k as income, and pay tax at today's rates, up to $12.5k in the top tax bracket.

I have a similar experience to the example, although over a much shorter time period. My parents built a minor dwelling on their property in 1995, which was later subdivided. It was rented out from 1995 until last year when we inherited it. Depreciation recovered is almost exactly the same as the example given above -$37,301 to be precise, so we have an IRD bill of $12,309 for the depreciation recovered.

Fortunately, one of the estate's beneficiaries is resident overseas. Because he has no NZ income, he's effectively on the lowest possible tax rate, so we'll distribute the $37,301 income to him, and he will get a tax bill at his lower rate, which the estate will pay, thus saving the estate around $6k.

[BlueSky]

I have a similar experience to the example, although over a much shorter time period. My parents built a minor dwelling on their property in 1995, which was later subdivided. It was rented out from 1995 until last year when we inherited it. Depreciation recovered is almost exactly the same as the example given above -$37,301 to be precise, so we have an IRD bill of $12,309 for the depreciation recovered.

Fortunately, one of the estate's beneficiaries is resident overseas. Because he has no NZ income, he's effectively on the lowest possible tax rate, so we'll distribute the $37,301 income to him, and he will get a tax bill at his lower rate, which the estate will pay, thus saving the estate around $6k.

As long as that is his to keep, if he transfers your share back to you, then no

[Rosco]

Hi Sandie,

The first part would be to look at the financial statements and see what the accumulated depreciation actually is. Ask your accountant or

In your financial statements, do they have an Fixed Asset schedule, or page that shows the cost of the building, the accumulated depreciation and closing book value?

If it shows accumulated deprecaition for the building, this is the maximum depreciation you can recover.
If it just shows cost and closing book value, then cost minus the closing book value = accumulated depreciation

2) Is the building worth the cost or more? In some cases older buildings are just going to be demolished so can be valued a lot lower. Or if it was leaky etc. If the building is worth significantly more than the cost value, then you are going to recovery all the accumulated deprecaition.

3) Who owns the property and what tax rates. If lower income earners, the tax rate might only be 17.5%, or 17.5% for some of the recovery. This might reduce your tax bill considerably.

Ross