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  1. #1
    Join Date
    Sep 2009
    Location
    Auckland
    Posts
    31

    Default Depreciation claims and recovery

    Hi all,
    We have sold our rental to our LAQC, so we have to pay back the depreciation claims to date.
    Building =$100,000, depreciated for 5 yrs @ 4% =$18,500 @33% tax rate = $6,105
    Chattels $30,000 depreciated for 5 yrs @ 18% =$19,000 @33% tax rate = $6,270
    So we have to pay IRD $12,375( to keep it real simple).

    Now, for our LAQC, it can claim the depreciations based on the same values;
    Building =$100,000 @ 2%
    Chattels =$30,000 @ 18%
    Are we doing it right? We realise this is not the best way. But it is a “right’ way, right?
    How would you do it?
    Last edited by grasshopper; 27-10-2009 at 05:17 PM. Reason: incorrect formula used

  2. #2
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,638

    Default

    1) What has happened to the building value over your ownership? If it has dropped in value by $18,500 or more, then there will be no depreciation recovered.

    You will need a valuation to transfer from personal ownership to LAQC. So try to get the building value as low as possible, and the land value as high as possible.

    2) Is it just chattels $30k, or is it broken down, say carpets $10k, curtains $5k, fence $1k, deck $2k etc etc. If so the conservative/safe approach would be to obtain another chattels valuation at the sale date, and then sell these assets at the new valuation. Generally there is little or no depreciation recovered on most chattels as they do actually reduce in value. A more aggresive approach, is to just sell chattels at book value, so again no depreciation recovered.

    If all your chattels are just lumped together, then it is really hard to prove a reduction in value. Also I hate this approach as how do you justify the 18% depreciation? exactly what are you depreciating?

    3) New depreciation rate for building on dimishing value basis is 3%, compared to old rate of 4%. Yes this is limited to related party book value, so $100k cost less depreciation claimed of $18.5k, leaves a starting book value of only $81,500. Then 3% on this.

    4) Watch that chattels may have gone from new with 20% loading, to old/second hand assets with no loading. Once again limited to related party book value. Unless apply to IRD, but who likes to identify something to audit to IRD?

    5) Definetly separate out chattels going forward.

    6) Do you have a commercial reason why you are doing this transfer? ie all other rentals in LAQC, so simplifying structure. Asset protection doesn't normally work, as LAQC would normally be personally owned.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.

  3. #3
    Join Date
    Oct 2003
    Posts
    3,578

    Default

    Quote Originally Posted by Rosco View Post
    Yes this is limited to related party book value, so $100k cost less depreciation claimed of $18.5k, leaves a starting book value of only $81,500. Then 3% on this.
    Even though the depreciation is recovered, are you still limited to the related party book value?

  4. #4
    Join Date
    May 2007
    Location
    Hamilton
    Posts
    3,638

    Default

    Yes, unless as I stated above you apply to IRD.

    Ross
    More Profit from Property? TEACH ME MORE
    Ross Barnett - Coombe Smith Property Accountants
    Proud to give the best property advice for over 13 years.


 

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