Depreciation recovery

[dinesh]

I have two investment properties. One is owned by LTC and another in joint name. I hold 99% share in LTC whereas my wife has 1%. I am earning 80K PA and my wife earns 26K. Due to lower interest rate both properties are now positive gearing (profit PA LTC -10K , joint 20K). To make tax efficient i want to change share holding pattern of LTC (1% me , 99% mywife) and sell jointly owned property to LTC. What will be the implication?
I purchased both rental properties in 2015-2016 hence does not attract any tax on the capital gain, which is around 400K. But depreciation recovery is a concern. I got a valuation of chattels for both rentals at the time of purchase. Is it possible to avoid depreciation recovery? If I take the depreciated value of chattels as an initial value once transferred to LTC The original price of chattel is 70K & 62K for LTC and joint rental respectively whereas opening value as on 31st March 2020 are 40K and 35K.
Regards,
Dinesh

[Anthonyacat]

In general, chattels do not have much in the way of depreciation recovery. They tend to devalue at around the same rates IRD allows your claim. You'll need to speak to your accountant and actually consider the condition of your chattels to be sure, this is a rule of thumb only.

There are a lot of considerations when restructuring LTC shares, not least of all that if you do it with a primary intent of tax reduction that this can be deemed tax avoidance by IRD and overturned. But assuming that is not an issue, the biggest consideration is the resetting of the Bright Line test, if you sell within 5 years from the transfer date.

Again, talk to your accountant!

[Wayne]

I would think that IRD would see this as aggressive avoidance.
Certainly that's the advice I had for similar but not as agressive (was going for 50/50).
Your accountant may consider otherwise.
You could ask IRD for a ruling.

[mrsaneperson]

Why not sell 1 or both properties ? At the point of a sale my understanding is you may be able to avoid some or all depreciation recovery by having a new chattels valuation done , dependent on the new values.
Simply transferring is not a sale in itself. There is no property speculation tax to pay after the 5 year ownership mark as far as I'm aware.

[Anthonyacat]

Why not sell 1 or both properties ? At the point of a sale my understanding is you may be able to avoid some or all depreciation recovery by having a new chattels valuation done , dependent on the new values.
Simply transferring is not a sale in itself. There is no property speculation tax to pay after the 5 year ownership mark as far as I'm aware.

Transferring LTC shares is a deemed sale.
There are property speculation taxes to pay after 5 year ownership, in some circumstances.

[mrsaneperson]

Thanks for the correction.