It was no great surprise when last year’s budget removed the ability to claim depreciation on most buildings from 1 April 2011. The Government had clearly signaled its intention to remove some incentives for Kiwis to invest in residential property – and depreciation was flagged as one of these.
So from 1 April 2011, depreciation won’t be available as a tax deduction for most buildings. Rather clear-cut at first glance.
But when does an item in a residential rental property become a separate chattel that can be depreciated in its own right?
Good question – and one that we are asked often. We see all sorts of opinion from aggressive splitting of every last component through to the conservative view that depreciation is no longer an option. Here’s a three step guide to help find an answer:
Step 1: Determine whether the item is in some way attached or connected to the building. If it is completely unattached, it will likely continue to be depreciable even after 1 April 2011.
Step 2: If the item is attached, is it an integral part of the building? Would the property be incomplete without the item? If the answer to these questions is yes, the item is an integral part of the building and unable to be depreciated from 1 April. If the item is not an integral part of the building, go to step 3.
Step 3: Is the item attached or connected to the building in a way that it’s part of the “fabric” of the building. Consider the degree of attachment, the difficulty involved in removal and whether removal would result in significant damage to the item or the building.
So what does this mean?
It is clear that the likes of plumbing, electrical wiring, internal walls, doors and kitchen units are part of the building and cannot be depreciated separately. The property would be incomplete without these.
At the other end of the range of possibilities, it is clear that items like fridges or heaters that can be unplugged and taken away are separate assets. These can continue to be depreciated. The same would apply to curtains and blinds which can be easily removed without damage.
But where it gets a bit gray is with the likes of carpets, bathroom cupboards or hot water cylinders.
If a bathroom cupboard is attached to the wall by only a few screws and can be easily removed without damage, it is likely a separate asset. Similarly carpet can usually be easily removed without damage – and many rental properties have bare floor boards. So we would be comfortable to continue depreciating carpets separately. And hot water cylinders are usually attached only to the power and water supplies – so we would consider these to be separately depreciable.
Check with us before applying this to your own situation as each set of circumstances can throw out a different answer. But the point here is that despite the changes announced in the budget, all is not lost. There is still potentially some room to depreciate the chattels in your residential rental property.