Can anyone enlighten me as to how the IRD treat capital profits with regards to ‘depreciation recovered’?
Is there a timeframe after which if you sell, DR is not applied…or whether holding property in your own name or another structure matters?I looked back through 10 pages for a thread…apologies if this has been addressed.
Regards.
Hi, I’m not overly experienced but have had some direct experience with this.
Not sure how you have depreciation recovered and capital gains tied in. As I understand it, capital gain in NZ are taxed only if you are a trader and the original intention was to buy and sell the property for a gain as opposed to buying to realise income (rent). If you sell with them latter intent your capital gain should not be taxable.
DR is a separate issue. If you claim it with a LAQC (Loss Attributing Qualifying Company) company you are liable to repay any depreciation claimed in the following tax year. There are ways to minimise this recovery but your accountant can best explain this as it gets a bit technical.
Hope this helps, and may be other more experienced investors and/or accountants can further comment and correct any details I have got wrong.
Cheers
Depreciation is recovered when the sale price of the property is greater than the written down value of the property. This is the case regardless of how long the property has been owned. It also doesn’t matter how the property is owned. The rule applies to all ownership structures. The depreciation recovered is treated income in the tax year in which the settlement occurs.
exactly right sinead, this is exactly the situation and the DR can be significant if you have owned the property for a few years, definitley something to weigh up if considering selling or Re-financing, i guarantee a lot of people have not thought of this.
when the going gets weird the weird turn pro
Thankyou for your replies. I guess I should have outlined that I have recently sold some property and realised capital gain. The fact I have only had it for 2 years may trigger a depreciation recovered event. It was intended for a long term hold, however it made sense to take the profit and pay down other property investment debt.
I am concerned that I didnt factor DR into profit equation, and had heard that it is applied at a descretionary level depending on whether one is classified as a trader by the IRD. In which case – the root of what I am trying to get at is – whether there is an established timeframe that one holds a property before being classed as a trader – or successfully argue that the investment was intended as a long term hold.
I may post this on NZ board also and report back to anyone else who may be interested.
Many thanks.
I think you may be confusing depreciation recovered with tax on the capital gain when you sell. Depreciation recovery is always triggered when you sell a property at a profit(assuming you have claimed depreciation) regardless of how long you have owned the property and is not in any way related to whether you are a trader or investor. Depreciation recovery applies to all ownership structures equally.
The distinction between being a trader or investor is important with regard to paying income tax on the capital gain realised when a property is sold. If you are classified by the IRD as a property trader then regardless of how long you owned the property you will be liable to income tax on the gain. If you are a property investor the IRD will look at the original intent at the time of purchase (keep evidence of intent e.g. company minutes). If the intent was to hold long term but cirumstances changes and you ended up selling then you would most likely not have to pay tax on the gain. If on the other hand you always intended to sell the property then you would be liable for tax on the gain.
Thankyou for your response Sinead.
Until today – I hadn’t realised that in NZ DR is always applied to capital gains upon sale, where one has been claiming the depreciation. From the reading I have done on other NZ based forums – I dont see it as a negative. As an investor who also holds Oz based properties I am not aware of it applying to Australian based property holdings, and I guess there may be a few other Aussie based investors who may have been in my situation.The issue over whether or not I may be classified as a trader is key to me. I have just sold some property that I have had less than 2 years enable me to purchase a PPOR in the coming months and relocate back to NZ. The original intent was for long term hold. To that end I was wondering whether I would be classed as a trader and subject to NZ CGT.
Any other forum members with experience and thoughts on this issue would be most welcome.
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