How much depreciation do I pay?

Question from Charlotte Small updated on 23rd May 2007:

Our expert responded:

When a property is sold, there are two kinds of 'profit'. The first profit is to do with your depreciation recovered and the second one is to do with your capital gain. In dealing with the second kind of profit first, this is obviously not taxable, assuming that your intention in buying the property in the first place was to buy a long term rental asset. If you have owned the property for only two years, you would want to ensure you have a very good reason for selling, so that if IRD comes knocking, you have good evidence of your reason for purchase and your reason for selling.

In looking at the first kind of profit, it is a revenue profit and this means we pay tax on it. How much we pay depends on the value of the assets at the time that we sell them. In claiming the depreciation to date, you will have already had tax benefits of $5,850, being 39% of $15,000. The maximum amount you will have to pay tax on is $15,000 (the tax effect being $5,850) as you can't pay depreciation recovered tax on that which you have not depreciated. The way to reduce the amount of depreciation recovered is through third party evaluations of what the assets are worth at the time of sale and demonstrating that the growth in value (ie the $45,000) has been in the land value. Please note that your opinions and thoughts in relation to these matters are of no relevance. You must be able to show what an independent third party thinks the value is.

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