IRD quietly raises changes to depreciation

The contentious issue around how depreciation of residential rental property items has resurfaced in a very low key manner.

Tuesday, January 12th 2010, 12:00AM 6 Comments

by The Landlord

Inland Revenue released a discussion document last year outlining its latest views on how investors should treat depreciation.

Although a press release was put out in November very few people were aware of either its existence or the dicussion document.

When IRD raised this issue three years ago there was signifcant opposition to the proposed changes.

The IRD acknowledges its "Residential Rental Properties - Depreciation of items of depreciable property" had previously been released for comment and, "in response to earlier submissions, has been amended and released again for further public consultation".

The IRD set a December 18 date for submissions, however it is unclear how many submissions were made as many investors were unaware of the document.

According to IRD, "the most significant change is the development of a three-step test that will be applied to determine whether an item should be treated separately or as part of the building".

That is, investors need to determine whether an item is:

attached or connected to the building
is an integral part of the building
if removed, what damage could be caused.

Its draft statement also includes an appendix with common items, such as plumbing, electrical wiring, hot water cylinders, doors, and cupboards, and states whether these are viewed as separately depreciable items or part of the building.

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Comments from our readers

On 12 January 2010 at 9:51 pm Andy said:

and fair enough - plumbing, electrical wiring, hot water cylinders, doors, cupboards, letterboxs - HELLO were does it stop shall we claim for the nails as well ...............

On 13 January 2010 at 8:52 am Alistair said:

Depreciation is a provision to replace the expired part of an asset and in a property used for long term residential rental items such as kitchen units, letter boxes baths etc do need to be replaced there fore should be depreciable. I would accept that interior walls in a residential rental may not wear very fast over the useful life but in a commercial building interior walls are likely to have a shorter lifetime so again it should be acceoted that they are depreciated though at different rates. You could argue that things like electrical reticulation and plumbing do need to be replaced over time and they to should be depreciable but have the same depreciation test as to whether it is a commercial or residential lease. If a building is subsequently sold the depreciation is sorted through the "depreciation claw-back" regime.

On 13 January 2010 at 11:20 am Mark said:

Andy, I take it you don't own rentals, otherwise you would know that things like hot water cylinders, doors, cupboards, letterboxes etc frequently need repairing or replacing within the 50 year "estimated useful life" of a building and therefore should be depreciated at a higher rate.

I agree the pipes and wiring generally last as long as the building, however the power points, light fittings, taps, shower cubicles etc are frequently replaced well within a 50 year period.

My accountant thinks this could backfire on the IRD - if people can't depreciate these things they are more likely to claim them as an upfront expense, even if it means they need to "repair" things instead of replace them.

All businesses operate under the same depreciation rules and the idea that residential property gets preferential treatment is misguided.

On 13 January 2010 at 11:32 am Andrew said:

No surprise here. When all the hype about depreciation was around some six years ago, I asked my accountant for his opinion. He wrote among others, to IRD, and strongly advised me not to go with this detailed depreciation lark as they (IRD) were looking at it then. I took that advice and depreciated only the main items - appliances, floor coverings, curtains/drapes and so on. What surprised me was the continual promotion by some companies at PIF conferences and the like who claimed to have a way round these concerns.

On 14 January 2010 at 5:31 am Dr Graham Tayler, Ph.D Accounting & Finance said:

Imputed rental value of owner occupied housing (net of mortgage interest and some expenses) should be taxed as income. This was the case in the UK until the 1960's. It's explained on the internet - just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.

On 15 January 2010 at 3:14 pm Mark Brown said:

Andrew, I have been to all the PIF conferences in the past 8 years and I never saw or talked to any companies "who claimed to have a way round" the depreciation lark, as you put it, rather they were utilising the rules as they exist at the time and published by the IRD and in use since 1994.(and still currently published by the way.) The IRD admits the rules as published were correct by stating in their own publications that when the work on establishing the legal definition of a building is complete, "the rates as currently published may not then be correct" They are now changing the rules just as they have changed a number of rules over the years and will continue to do so.

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IRD quietly raises changes to depreciation

The contentious issue around how depreciation of residential rental property items has resurfaced in a very low key manner.

Tuesday, January 12th 2010, 12:00AM 6 Comments

Comments from our readers

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