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How Should I Depreciate Rental Property?

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Contributor:
Mary Holm
Mary Holm

Question:

I have also been shown 'the new way' of depreciating rental property - with items such as wiring, plumbing and partitions depreciated faster than the building itself - which gave me misgivings.

If the IRD does rule against this practice are they able to just ask for the difference to be paid or could they also (if they wish) impose penalties. If they could impose penalties, how severe might they be?

If you instructed your accountant to depreciate the old way and IRD subsequently ruled in favour of the new way, could you go back and re-claim the new way?
 

Answer:

Mary Holm: It's nail biting time.

The IRD says that, if a taxpayer over-claims depreciation deductions, not only would the difference have to be paid, but "use of money interest is likely to be payable."

"In addition, shortfall penalties may also be imposed by Inland Revenue. This would be considered on a case-by-case basis."

Interest is charged at 13.08 per cent a year. And shortfall penalties range from 20 to 150 per cent of the extra tax owed. Ouch!

On your second question, the spokesperson said, "Inland Revenue is currently reviewing the correct treatment for depreciating parts of a building.

"We are not in a position to comment on whether the commissioner would amend a taxpayer's previous years' assessments when the taxpayer had not claimed at higher rates, but who subsequently seeks to have those years adjusted."

But wait, I thought when I read that, there must be a general rule about this. So I asked the spokesperson: "If someone realises they have not taken deductions as big as they are entitled to in a past tax return, can they re-file and get a refund?"

Back came the reply: "A taxpayer cannot re-file a return - however they can seek an amendment to a previous assessment.

"Requests by taxpayers for IRD to amend a previous year's assessment are considered on a case-by-case basis in accordance with IRD's Standard Practice Statement INV-510, Requests to amend assessments.

"There are restrictions on how long after a tax year a refund can be issued by the Commissioner."

That's as far as we're going to get. So where does it leave you?

Given that the IRD's present view is that people who own buildings must depreciate wiring, plumbing and so on at the same rate as the building, I would stick to that if I were you. Those penalties are tough.

Perhaps you'll just have to settle for superb tax-free capital gains recently, and a still generous depreciation regime.

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.  

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