Leasehold depreciation split of building/land

[DadOf3]

Hi There
Can anyone give me some guidance please regarding depreciation split on leasehold property?
I have currently got the IRD arguing with my acountant over whether on a leasehold property the total purchase price can be depreciated. I think it should be as I do not own the land!
The IRD are saying that due to the valuation I have which mentions on how they valued the property I have a $65k interest in the land and hence IRD are saying this should be treated as the split ($175k paid hence depreciate $110k and treat $65k as if were land). The land alone is worth over $250k!!! and I pay a big lease in turn!
Any guidance on how I can politely explain to the IRD they are wrong? (that is of course if they are wrong ) Thanks for your help in advance...

[artemis]

Can't really help, sorry, but I wonder if the $65k interest in the land is related to the difference between current actual land rent and current market land rent.

If that's the case, I can see where IRD (and the valuation) is coming from - that there is a value attached to the land.

[DadOf3]

Thanks Artimas
The $65k was derived by the valuer to add to the value of improvements (the building that depreciates over time). As on leasehold you do not own the land and the building does not go up in value the increase in value has to be put down as a tangible benefit (in this case $65k). I still pay a lease to the owner of the land which takes into account the value of the land (only renewed couple of years ago...)
Thanks for your reply.

[artemis]

A building can certainly go up in value. Even in the IRD world, if items after purchase are capitalised (eg cost of adding a room).

So, do you mean that the $65 was not for the land, but was for improvements?

(I'm a bit confused.)

[DadOf3]

Not easy to get head around I agree.
When I refer to improvements I meant the building (as built when new say - not improvements like adding a room). The $65k is the $value (intangible value) the valuer worked out the lease was worth as a premium to the tangible asset (the building). I'm not a valuer so forgive my explainations. The IRD seems to be getting hung up on the wording "use of the land" and interpreting as a payment toward the land...
Hope this clarifies things.
Thanks

[tricky]

A building can certainly go up in value.

I agree. And by heaps.
In the mid 70's local houses were valued at $30k - about $10k for land and $20k for the building.
Today these same houses are valued at $300k with the land valued at $150k and the house $150k.
Note - no change to the house at all.

[DadOf3]

Thanks Tricky, not arguing the point of improvements going up in value. I would argue that the price of land (in most cases) goes up in value even more though.

Back to my original question regarding depreciation...

Anyone out there with a Leasehold property? Do you claim 100% of purchase price (or have a friend that does)??

Just want to be sure I've got my facts right.

Thanks

[Monid]

Hi Dadof3
I'm afraid that while I don't own any leasehold property I think the IRD are right on this one.

You see you didn't pay for the house alone when you bought the property you also bought a right to occupy the land it is on for a particular duration at a particular fee. In other words you bought both the house and the lease.

That lease does have some value of it's own which is why the price of leasehold properties often goes down when there isn't much time left until the lease runs out or the price of the lease goes up.

So the IRD are quite right to not allow you to depreciate the value (as determined by your valuer) of that lease as it isn't a depreciable asset.

Cheers
David

[DadOf3]

Thanks David, so the moral of the story is next time a valuation is done on a Leasehold property ask for the Valuer to use capitalisation method as used on commercial properties so no "benefit of interst in land" is mentioned?
Thanks for your reply.

[Rosco]

Hopefully some help

Hi Dad of 3,

Depreciation is based on your cost. So the first steps is to reveiw the sale and purchase agreement, if this states you brought just the building for $175k, then it doesn't matter what a valuation says,

1) when you brought the property did the sale and purchase agreement stipulate what you were buying? ie $175k for the building? Or does it say $65k for the use of the land, $110k for the building. If the sale and purchase agreement sets out that building value, then this is what you can depreciate.
2) does the sale and purchase agreement clearly identify that you are just buying the building? If so, then it should be fully depreciable
3) If there is no mention of a split in values between land and building in the sale and purchase agreement, then it would be based on a valuation at the time of buying the property. It doesn't matter what the land component is worth now, but what it was worth when you brought it!

If you want to talk this through give me a ring on 021 715 707 and I can probably give you some better answers with some more information.

Ross

[captaincrab]

Alas the IRD is right. A value can be attached to the term left to run on the lease.