Many property owners have little appreciation for depreciation. That’s no surprise. Rental property ownership can be confusing. To set you on the path to depreciation clarification, we’ll give you a short definition. Basically, depreciation is a reduction in the value of an item over a period of time. Much of this reduced value is due to wear and tear.
Now we’ve defined depreciation, let’s understand it. By doing so, you can reduce tax and know your rights under the laws relating to depreciation.
As you may have heard, the laws have changed in recent years. Since 2011, you can’t claim depreciation on buildings with an estimated life of 50 years or more. Unfortunately, this is the life span of most rental properties, ruling out depreciation on the building. So, what can you claim depreciation on if not the building? For the answer, we need to chat about chattels.
Any item separate to the building can be considered a chattel. However any item that’s an integral part of or firmly attached to the building, is considered to be a part of the building and cannot be depreciated.
Of course, you know as well as we do, that a chattel is not really a chattel until the IRD says so! In 2011, they released a list of items that qualified as chattels and were, therefore, still depreciable. The list includes things like appliances, bedding, drapes, cutlery, furniture, glassware…even mailboxes. We’ll happily go through the complete list with you. This will ensure you know what you can claim on. You might be surprised!
While the IRD’s list includes depreciation rates for each item it doesn’t have cost values. That information is vital. To maximise your depreciation deductions and to reduce tax at the end of the year, you must accurately identify the cost of each chattel. If you’ve just purchased a new chattel, the cost is a breeze to identify. Just look at the price tag.
Things aren’t so easy when looking at existing chattels. When you buy a property, you also buy an array of chattels; carpets, stoves, light shades are just a few of the better-known ones. How do you place a price on these items?
One option is doing your own chattels valuation. That involves researching the correct market value of each item. If that sounds like fun to you, then go for your life. But doing it yourself can see you miss out on maximum deductions.
The alternative is to employ the services of a professional chattel valuation expert. They’ll do all the work for you for several hundred dollars. This could be money well spent. An expert will give you a full breakdown of chattels, their values and the IRD depreciation rates. This will also reduce your risk of penalties in case of an audit. Nicer still, you’ll probably maximise your depreciation claim.
Deciding whether to do it yourself, in the good old Kiwi way, will likely depend on the rental property you own. The newer it is, and the higher it is in value, then a professional valuation is probably your best bet. If it’s a new investment, get the chattel valuation done within six months of purchasing your rental and, obviously, before you submit your tax return.
We can help you in other ways too. For example, our Quick Claim Guide will give you a better appreciation of depreciation and other things you can claim on your rental property. For your guide email us at [email protected]