IRD adamant on depreciation

Landlords vow to fight the IRD over depreciation

After two years of consultation, Inland Revenue is refusing to budge from its view that owners of residential rental properties cannot depreciate assets - such as plumbing, wiring and kitchen joinery - faster than the actual buildings they are in.

"It seems absolutely crazy to us," said Andrew King, president of the Auckland Property Investors Association. "We will have to look at other means - whether it is legal or political - to change their opinion."

In a 2004 issues paper, the IRD noted an increasing practice by landlords of claiming separate and faster depreciation for things such as wiring, plumbing and internal walls, using the building fitout provisions of the depreciation rules for commercial property.

Even though the depreciation is clawed back when the property is sold, it provides timing and cashflow advantages to the property owner.

IRD Deputy Commissioner Naomi Ferguson said property owners could still depreciate chattels such as carpets, drapes, light fittings and whiteware as separate assets.

"There is also provision to depreciate separately items such as water heaters, clotheslines and other fittings that are not part of the building. The items that Inland Revenue does not believe to be separate assets are internal walls, doors, electrical wiring and plumbing and so on, as well as furniture and fittings that are permanently attached and are regarded as being part of the building.

"These include items such as kitchen cupboards, bathroom vanities and built-in wardrobes."

But King said houses were replumbed and rewired all the time. There was an entire industry providing new kitchens for existing homes.

"All of these items can be identified and have a value attached to them and they last for a shorter time than the building."

The IRD says property owners who have been splitting these components from the cost of the building and so overstating their depreciation claims will not be asked to repay the money.

"However," said Ferguson, "they will be required to add the value of the various 'components' they have been depreciating individually into the cost of the building, and combine the depreciation claimed for those individual assets ... The building should then be used to claim depreciation at the correct rate."