Is an inherited property a depreciable asset?

[artemis]

I asked the following question on the Trademe message board. No answers there yet, and thought I'd probably get a better answer here.

This is from the IRD booklet IR260 - Depreciation:

"If you inherit depreciable assets, there can be no
depreciation because there has been no cost to
you."

This relates to claiming depreciation after transfer from the estate.

What is not clear to me is whether this means that the asset is then no longer a 'depreciable asset'. Because according to IR260:

"A disposal or sale of a depreciable asset triggers either
a gain or loss on disposal."

Does anyone know?

[Tan]

Call IRD. 0800 227 774

[CJ]

why would the gain be taxable if you did dispose of an inherited asset. You wouldn't have acquired with the purpose of resale etc.

Therefore the gain is most probably a capital gain.

Do you want to share more facts?

[ChrisD]

I don't understand what you're trying to ascertain. Can you please elaborate?

[artemis]

If I inherit, say, a commercial building I can't claim depreciation on it because the cost is zero. (I assume there would be a depreciation clawback from the estate to IRD.) I assume that if no depreciation can be claimed, thus there can be no clawback, then there is no loss or gain triggered on disposal, and all proceeds are capital gain. Does that clarify?

[flyernzl]

all proceeds are capital gain.

Yes.

If the estate had left you cash, that's not taxable in your hands.
Therefore the sale price of the asset you inherited and sold is not taxable in your hands.

[Re@der]

Yes again you will have no clawback. You have claimed no tax reduction on depreciation so therefore there is nothing to base a clawback on.

[Perry]

This makes no sense to me. Because it was acquired
for a particular price, it cannot depreciate? (Overlook
the zero price, for now).

If I buy a building for $100k (being a fire sale price:
an independent valuation says $250k), any depreciation
has to be on purchase price, rather than valuation?

Surely depreciation is a factor of life-expectancy of the
materials/construction, etc? Not what it cost to buy.
I.e. the structure depreciates; not the price paid for it.

[CJ]

If you buy a tractor (buildings dont depreciate anymore so I will use a farm tractor as an example) for $20,000 even though RRP is $30k you only depreciate the $20k.

Not sure what that rate is but say 10% SL.

Over 10 years you would fully depreciate it (at $2k per year). If you depreciate the market value of $30k, you will depreciate more than the cost to you.

Now say you inherit the same tractor. Cost to you is $0 so you cant depreciate anything as it has cost you nothing.

Now, say in the first example you acquired with the purpose of resale and you sold it for $25k. You would be taxed on $5k income.

But if you sold the inherited one for $25k, you would have a capital profit of $25k as you didn't acquire with the purpose of resale (or any of the other tests that convert a capital gain into an income gain).

[graemeh]

So sell the inherited tractor for $25k and buy a new one for $20k.

You will have $5k cash in your pocket and be able to claim depreciation on the new tractor.

[Perry]

It still makes no sense to me, at all.
Tractors depreciate, irrespective of
purchase price. Depreciation happens
to things, not to the purchase price.

Depreciation should be $$$ put aside
for a replacement - in theory. The
usual idea is that depreciation covers
the wear & tear and loss of usefulness
or functionality of an item, as part of
that item generating an income.

If I owned a vintage tractor that has
now appreciated in value, from $3k to
$5k, all while I make hay to sell with it,
what of depreciation in that case?

[CJ]

It still makes no sense to me, at all.
Tractors depreciate, irrespective of
purchase price. Depreciation happens
to things, not to the purchase price.

Depreciation should be $$$ put aside
for a replacement - in theory. The
usual idea is that depreciation covers
the wear & tear and loss of usefulness
or functionality of an item, as part of
that item generating an income.

The idea of depreciation is that you dont get to expense the purchase price in the first year, but over the useful life.

If something cost you nothing, then use suffer no cost as it depreciates so you dont get to spread that cost.

[ChrisD]

Wow this really isn't hard to understand....or is it?

[Wayne]

The idea of depreciation is that you dont get to expense the purchase price in the first year, but over the useful life.

If something cost you nothing, then use suffer no cost as it depreciates so you dont get to spread that cost.

that is the best summing up I have seen - simple really.

[spaceman]

You're all evil dream-stealers ..... If Perry wants to depreciate something that cost nothing who are we to stand in his way???

Cheers
Spaceman