Depreciation is the measurement of wear and tear on an asset that forms part of a taxable activity. The depreciation that the Inland Revenue Department will allow you to claim can be offset against your income. This provides you with a tax free portion of income. Your saving is the tax that you would have had to otherwise pay. The higher your depreciation, the higher your tax saving.
Up until 1993, depreciation on rental investment properties was generally claimed at 4% of the dwelling value including chattels. Land was and still is not claimed upon because land is quite rightly considered by the IRD not to depreciate.
In 1993, the Inland Revenue Department introduced new tax depreciation rates for assets. This allows for the value to be split between the actual building cost and the fit out categories providing that the valuation is performed by a Registered Valuer and shown separately in the books of account. ‘Fitout categories’ covers a wide range of components which traditionally have been depreciated as part of the building.
This separation must be done in the year of purchase. It is not permissible for the same entity to apply this treatment to properties which have already been depreciated.
The structure of the building remains depreciable by 4%. Various higher rates of depreciation apply to the fitout of existing dwellings under IR260, e.g.
fences—9.5% diminishing value (DV),
partitions (non load bearing) – 9.5% DV,
electrical reticulation—7.5% DV,
plumbing fixtures—7.5% DV,
$17,500 depreciation in the first year using a Prendos schedule. Tax adjustment at 33 c tax rate
= $5,775 pa or $111 per week
New houses attract higher depreciation than above.
Besides the fitout, the Inland Revenue Department under IR264 allow various depreciation rates for items that are more commonly thought of as chattels. These include, amongst others;
carpets, 33% DV,
$6,500 depreciation in the first year using a Prendos schedule. Tax adjustment at 33 c tax rate
= $2,145 pa or $41 per week
The Prendos team skill base of Registered Valuers and Quantity Surveyors makes them ideally suited to provide sound and accurate depreciation schedules throughout Auckland. Each schedule is prepared in accordance with IR260 and IR264. All calculations are retained for audit or adjustment if chattels are changed.
The good news
Prendos fees are competitive and they value throughout greater Auckland AND if you require a Registered Valuation for mortgage purposes and a Depreciation Schedule for tax purposes on the same property at the same time, Prendos will discount their already competitive Depreciation Schedule fee substantially.
When you sell
If you sell for a profit, your accountant will consider whether any depreciation claimed needs to be repaid. At this time, your original Prendos schedule can be used to identify items which obviously have not increased in value.
Advice on tax principles
For advice on tax principles, please talk to your accountant.