Property investment can be a great way to build wealth, especially when you understand the tax benefits available to you. One of these benefits is property depreciation, which allows you to reduce your taxable income by accounting for the wear and tear on your investment property. In this blog, we’ll cover what property depreciation is, how to claim it on investment properties, and the tax benefits of owning investment properties in New Zealand. We’ll also include a reference to the IRD website for more detailed information.
What is Property Depreciation?
Property depreciation is a tax deduction that allows property owners to account for the decrease in value of their property and its assets over time due to wear and tear, age, or obsolescence. While the building itself is generally not depreciable, certain assets within the property, such as appliances, furniture, and fittings, can be depreciated. By claiming depreciation, you can reduce your taxable income, thereby lowering your tax liability.
Example: If you own a rental property with a heat pump, carpet, and kitchen appliances, you can claim depreciation on these items each year as their value decreases.
Depreciable Assets Include:
- Appliances (e.g., ovens, dishwashers, washing machines)
- Furniture (e.g., beds, tables, chairs)
- Carpets and curtains
- Electrical fittings and heat pumps
- Garage door openers and security systems
Non-Depreciable Assets:
- The building structure itself (as of the current tax rules in New Zealand)
- Land
How to Claim Depreciation on Investment Properties
To claim depreciation on your investment property, you need to follow specific steps and keep accurate records. Here’s how to do it:
1. Identify Depreciable Assets
List all the assets in your rental property that qualify for depreciation. These include any items that are not part of the building’s structure, such as appliances, furniture, and fittings. Each asset should be listed separately, along with its purchase price and the date it was acquired.
Tip: Keep all receipts and records for the assets you plan to depreciate. This will help you accurately calculate their value and depreciation.
2. Determine the Depreciation Rate
The Inland Revenue Department (IRD) provides a list of depreciation rates for different assets. You can use either the diminishing value method or the straight-line method to calculate depreciation. Each method has its own rate and will yield different results.
- Diminishing Value Method: Depreciation is calculated on the asset’s adjusted tax value (its value at the start of the year minus any previous depreciation claimed).
- Straight-Line Method: Depreciation is calculated on the asset’s original cost.
Example: If you purchase an oven for $1,000, you can use the IRD’s depreciation rate to calculate how much you can claim each year. Suppose the straight-line depreciation rate for ovens is 8%. You can claim $80 each year as depreciation.
For more detailed information on depreciation rates and methods, visit the IRD’s Depreciation Rates Guide.
3. Claim Depreciation in Your Tax Return
When you file your annual tax return, include the total depreciation claimed for all eligible assets in your rental property. Use the appropriate forms and schedules as provided by the IRD.
Tip: Consider consulting a tax professional to ensure you’re claiming the correct amounts and following all tax regulations.
Tax Benefits of Owning Investment Properties in New Zealand
Owning an investment property in New Zealand comes with several tax benefits, including the ability to offset rental income with property expenses and claim deductions for certain costs. Here are some key tax benefits:
1. Claiming Rental Property Expenses
You can claim a variety of expenses related to your rental property, which can help reduce your taxable income. These expenses include:
- Interest on Mortgage: If you have a mortgage on your rental property, you can claim the interest as a deductible expense.
- Property Management Fees: Fees paid to a property management company are deductible.
- Repairs and Maintenance: Costs for repairs and general maintenance are deductible, provided they are not capital improvements.
- Rates and Insurance: Council rates and property insurance premiums can be claimed as expenses.
- Legal Fees: Legal fees related to the rental activity, such as lease preparation, can be claimed.
2. Depreciation on Chattels and Assets
As mentioned earlier, you can claim depreciation on certain chattels and assets within the property. This helps reduce your taxable income, effectively lowering your tax bill.
Tip: Keep detailed records of all deductible expenses, including invoices, receipts, and bank statements.
3. Bright-Line Property Rule
The Bright-Line Test applies to residential properties sold within a certain period of time after purchase. The current rule states that if you sell a residential property within 10 years of purchase, any profit made is subject to income tax. However, the Bright-Line Test does not apply to the sale of the main home, inherited properties, or properties transferred as part of a relationship property settlement.
For more information on the Bright-Line Property Rule, visit the IRD’s Bright-Line Test Guide.
Pros and Cons of Claiming Depreciation
Pros:
- Lower Taxable Income:
- Claiming depreciation reduces your taxable rental income, lowering your overall tax bill.
- Cash Flow Benefits:
- Lower taxes mean more cash flow, which you can reinvest in your property or use to cover expenses.
- Offset Wear and Tear Costs:
- Depreciation allows you to account for the natural wear and tear on your property’s assets, helping you recover some of the costs associated with maintaining them.
Cons:
- Depreciation Recovery:
- If you sell your property for more than its depreciated value, you may need to pay back some of the depreciation claimed as “depreciation recovery.”
- Record Keeping:
- Keeping track of all depreciable assets, their values, and the correct depreciation rates can be time-consuming and complex.
- Changes in Tax Rules:
- Tax laws can change, affecting what you can and cannot claim. Staying up-to-date with current regulations is essential.
Key Takeaways
- Property depreciation allows you to reduce your taxable income by accounting for the wear and tear on assets within your rental property.
- Identify depreciable assets such as appliances, furniture, and fittings, and use the correct depreciation rates provided by the IRD.
- Claim tax benefits like rental property expenses and depreciation to maximize your investment returns.
- Stay informed about tax rules and regulations by consulting the IRD website and seeking advice from tax professionals.
Understanding property depreciation and the tax benefits of owning investment properties can significantly impact your investment’s profitability. If you’re looking for expert guidance on property investment and management, contact NG Property Management today. Our experienced team can help you navigate the complexities of property ownership and maximize your returns.
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered financial or tax advice. NG Property Management is not responsible for any tax decisions made based on this article. For specific advice, please consult a qualified tax professional or visit the IRD website.
