Rental property and taxation

By MARY HOLM

Q: After reading your articles in the Weekend Herald, I've just got one question about rental property depreciation.

Can we choose not to depreciate property, but claim depreciation for chattels?

A: The simple answer is: Yes.

"It's a bit unusual, but there's no reason why not," says KPMG national tax director Craig Macalister.

"You'd have to calculate the opening value of the chattels," he adds. "A lot of people separate them out. Some are more scientific than others. Some people itemise down to the light fittings and glassware."

I presume you're considering this because you don't want to face a clawback of your depreciation tax deductions when you sell the property or stop renting it out.

It's highly likely there won't be a clawback on chattel depreciation, whereas its quite likely there will be on building depreciation.

That's because chattels, unlike many residential rental buildings, usually decline in value over time. Depreciation on chattels reflects what is really happening.

Still, many people advise in favour of claiming building depreciation. That way, you get the use of the money now, and don't have to pay it back until later, at clawback time.

And, as an old finance maxim goes, a dollar now is worth more than a dollar later. You can use the money in the meantime, or earn interest on it.

Also, if your tax rate drops - perhaps in retirement - the clawback won't cost you as much as the depreciation benefited you.

But the reverse is true if your tax rate rises. And some people don't like the thought of building up what is - in effect if not fact - a debt to Inland Revenue.

Macalister notes that the law requires you to depreciate income-earning assets.

That means that you can't just not depreciate. You have to formally elect not to - although in some cases you can elect retrospectively, when you sell, if you haven't been claiming depreciation.

Inland Revenue can give you information on that.

Q: As I am selling a rental property, I've really appreciated your advice on the depreciation clawback.

I am wondering if I am able to deduct the costs associated with selling the property, such as land agent's commission, from the sale price before apportioning the proceeds between land, buildings and chattels?

A: Yes, again. We are being agreeable today, aren't we.

Craig Macalister says you can deduct "any amount payable in disposing of the property".

That would include the real estate agent's commission, legal expenses, and advertising costs.

And yes, you would subtract those costs from your sale proceeds before apportioning the amount among land, building and chattels. That should reduce the clawback at least somewhat.

I think we've done our dash on rental property depreciation for a while, unless somebody comes up with a truly fascinating question. Now there's a challenge.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or email: maryh@pl.net

Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.