In addition to deductions for expenses, depreciation deductions could be claimed in relation to the cost of the building and other fixed assets such as furniture, but not the land on which the building is situated.
Depreciation is an allowance which recognises the fact that capital assets wear out and diminish in value over the course of their useful life.
If you bought the holiday home with the building already there, it is advisable to obtain a valuation which separates the acquisition cost between land and buildings, so that the depreciation "cost base" for the building is clear. If you purchased the land and erected a building on it, the depreciation cost base will be the cost of erecting the building. Note that depreciation deductions are subject to the same "availability for renting" apportionment requirement as deductions for ongoing expenses.
Depreciation deductions for the cost of a building and other assets used for rental purposes can be calculated on a "straight line" basis or a "diminishing value" basis.
The applicable depreciation rates differ depending on the asset concerned, but in relation to buildings they are 3 per cent a year (straight line) and 4 per cent a year (diminishing value).
The adjusted tax value of the building (or any other asset) diminishes in line with depreciation deductions claimed from year to year.
If, when you sell the property, the portion of the total sale price attributable to the building exceeds its adjusted tax value at the point of sale, the excess is taxable income up to the amount of depreciation claimed. This reflects the fact that tax depreciation rates may exceed the actual economic depreciation rates for many assets. If depreciation deductions have been claimed, it is advisable to obtain a valuation which divides the sale price between the land and the building.
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Q. We have owned a holiday home for two years, but as a result of changed family circumstances, we intend selling it. The property has increased in value so we will make a good capital gain. Is this gain taxable? If not, will we have prejudiced our position by renting it over the holiday period?
A. Generally, private land sale gains are not taxable in New Zealand. But there are a number of situations in which a tax liability may arise.
A sale gain will be taxable if you purchased the property for the purpose or intention of resale.
A sale gain will also be taxable if you, or a person with whom you are "associated", carries on a land dealing, subdivision or building business and either: the property was purchased for the purpose of that business; or you sell the property within 10 years of purchasing it - even if it has had only private use and is not part of the business.
In addition, if the sale profit is due to a change in district plan rules, the granting of a resource management consent or other similar matters, it may be taxable.
Finally, if you subdivide the property, the profit may also be taxable, even if the subdivision does not amount to a "business". You are advised to seek tax advice if any of these circumstances exists.
The decision to rent out the property over the holidays will not prejudice your position regarding the possibility of tax on any sale profit. Indeed, if an argument ever arose, prior use of a property for rental purposes may help to demonstrate that it was not purchased for the purpose or intention of resale.
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