Claiming depreciation

Question from Neil Franklin updated on 18th November 2010:

I have owned a rental property for 20 years and am considering selling it. I don't understand how the depreciation claimed over those years is treated. As the property has gained around 300% in value a profit has theoretically been made that is more than total depreciation claimed. Do I have to pay back this whole amount? Or having owned for more than ten years just the last ten years or what? If I have to pay it all back then apart from the interest free loans they have given me it means the longer I hold a property the less reason to sell it as my final return gets smaller? Any thoughts much appreciated.

Our expert Mark Withers responded:

It is only the accumulated depreciation that is subject to being added back as income. The capital gain is tax exempt. For example, if the property cost 100k and has been depreciated down by 30k to a book value of 70k the depreciation recovery is 30k. The extent by which the sale price exceeds the cost of 100k is tax free capital gain. Remember that the depreciation recovery is income so the tax is a third of the recovery, say 10k in the example.

The recovery is triggered in the year where the settlement occurs so remember that a sale after 1/4/11 will be the first full tax year where the new lower tax rates apply. You will have benefited significantly from this budget where you have potentially claimed the depreciation in years where the tax rates are going to be higher than the year when you wash it back as income.

Your situation is a timely reminder of the importance of a long term view with property investment. Time in the market has delivered a healthy capital reciept to you and no doubt you have enjoyed a cashflow from the property over the years. Tax regimes come and go but buying appreciating assets is always a sound plan. It would be interesting to know how big a bank deposit equivilent to your original deposit would be today if you had kept the same money in the bank. Good on you Neil.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

 

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