DEPRECIATION AND CHATTELS: WHAT TO DO?

Depreciation and chattels: what to do? It’s one of the most common sources of confusion for rental property owners, and the questions tend to come up at very specific moments. For example: you’ve just settled on a property, when you’re about to renovate, or when you’re weighing up a sale or an ownership change. Below we answer the FAQs we hear most often, provided in part by Valuit(opens in new tab).

Key Points – 30 Second Read

• Timing: There’s no strict deadline for a chattels valuation, but it’s best done close to settlement and, ideally, before your first tax return for the property is filed.
• Repairs vs. depreciation: This question now turns on IRD’s interpretation statement IS 26/01 — see our dedicated article for the current test and worked examples.
• Depreciation recovery on sale: If you’ve claimed building depreciation from before 1 April 2011, expect to pay some depreciation recovery when you sell.
• Claiming late: If you missed claiming depreciation in your first return, you can usually still get chattels valued and start claiming from that point
• Ownership transfers: Transfers between associated entities generally don’t trigger depreciation recovery, but they do reset your Brightline Test period. Talk to us before you transfer anything.

Common Depreciation FAQ

Q. We are going to get a chattels apportionment completed but do we need to have it done by a certain date?

A. The simple answer is “usually no.” Depreciation reports are always best completed as close to the time you take possession of the property but it is not critical. Valuit say “Depreciation is based on the property when you purchased it so our report and the figures within it are calculated based on that date. If any major changes have occurred then it is great if you have photo or video evidence.”

EpsomTax.com comment: It is best – if possible – to determine the value of the chattels before the first tax return for the rental property is filed.

Q: If I replace the carpet, blinds, light fittings, heat pump, or dishwasher in a house, would I be better off claiming chattel depreciation or repairs and maintenance?

A: This isn’t really a question of what’s “better”. Rather, it’s a question of what’s correct under IRD’s rules, and those rules changed with the release of interpretation statement IS 26/01. Whether a replacement is a deductible repair or a capital improvement now depends on identifying the relevant asset and assessing the scale and character of the work against a two-step test. There are real consequences for what you can and can’t claim in the year you do the work.

We’ve covered this in full, with worked examples covering exactly this kind of scenario, in Are Repairs to My Rental Property Tax Deductible? The one constant that hasn’t changed: get a chattels breakdown completed before you do any renovation work. This is so that you have a clear starting value for anything you go on to replace.

Q: Will I still have to pay depreciation recovery on buildings if I sell my property after 1 April 2011?

A: Probably yes. In most circumstances where you have been claiming depreciation on the buildings you will have to pay some level of depreciation recovery. This is why the removal of building depreciation for people buying residential property after 1 April 2011 is not so bad. Yes you lose the use of the depreciation during ownership but you will not have to pay depreciation recovery when you sell. For investors that owned property during the change date of 1 April 2011, your depreciation claim for buildings after this date will be zero. When you sell the property in the future you may need to pay depreciation recovery on the buildings for the depreciation you claimed prior to the change. (Depreciation on chattels is something else; see this article for more info on depreciation clawback.)

Q: Last year I did my own tax return as the income did not justify the accounting fees. I did not bother claiming any depreciation as I only owned the property for part of the year. This year there will be a whole year of rental income so it may be worth claiming depreciation. What is the best option?

A: If you didn’t claim depreciation in your first tax return you can get the chattels valued later, and claim depreciation from then on. However, in this situation, it might not be worth paying the fee for the valuation. Chat to us about the specifics.

Q: With the changes around ownership structures, if I transfer the ownership will this be deemed a sale and therefore incur depreciation recovery?

A: In 99% of cases, no. The transfer between associated companies will simply see the existing depreciation schedules transfer from the old entity to the new entity.

EpsomTax.com comment: you will, however, reset your Brightline Test period. That could cost you a lot of money if you subsequently sell and are caught by this test. Talk to us before you transfer anything!

Q: I have another question not answered here.

A: Still concerned about depreciation and chattels: what to do? No problem! Contact us today!

Summary

Chattels depreciation raises the same handful of questions again and again:

• when to get a valuation done,
• how to treat replacements and renovations,
• what happens on sale, and
• what happens if ownership changes.

Timing is flexible but best done early. Repairs vs. improvement now hinges on the current IS 26/01 test rather than the older, vaguer guidance. Depreciation recovery is a real cost to plan for if you’ve claimed building depreciation from before April 2011. Ownership transfers are usually straightforward for depreciation but carry a Brightline Test trap worth knowing about in advance.

More Info

For more information on chattels, see the rest of our four-article series:

1. Why You Should (Almost) Always Get Chattels Valued. This explains the business case — why a dedicated valuation beats a standard registered valuation, 8 reasons, exceptions.
2. Depreciation of Chattels in Your Rental Investment Property. This covers the classification test — IRD’s 3-step test for what counts as a chattel vs. part of the building, with worked examples.
3. Depreciation and Chattels: What to Do? This one. Explains the practical FAQ — timing of a valuation, ownership transfers, catching up on missed claims
4. Depreciation Clawback and Your Rental Property. The exit-side mechanics — what happens on sale or change of use.

Talk to Us Before You Decide

Is it a renovation, a sale, an ownership transfer, or simply catching up on a missed depreciation claim? Every one of these situations has a right answer that depends on your specific circumstances. Getting it wrong can be costly, and some of these decisions – like ownership transfers – can’t easily be undone. Contact us today before you make your next move. We’ll make sure you’re claiming everything you’re entitled to without any nasty surprises down the track.