DEPRECIATION OF CHATTELS IN YOUR RENTAL INVESTMENT PROPERTY

Depreciation of chattels in your rental investment property comes down to a simple question: is this item a chattel, or is it part of the building? Get that classification right and you can claim depreciation on it each year; get it wrong and you risk under-claiming what you’re entitled to, or over-claiming and running into trouble at audit time. Fortunately, IRD sets out a clear three-step test to work through for any item you’re unsure about. Before we tackle that though, here is an overview:

Key Points – 30 Second Read

• Chattels are depreciable; the building itself is not (aside from limited exceptions). Getting the split right matters for your tax bill.
• IRD uses a three-step test: is the item attached to the building? Is it integral to it functioning? Is it part of the building’s “fabric”?
• Plugging or wiring something into a power, water, or gas outlet doesn’t count as “attached” — that item can still be a chattel.
• Worked examples below (heat pump, freestanding vs. built-in kitchen appliances, carpet vs. tiled flooring) show how the test plays out in practice.
• Still unsure about a specific item? A chattels valuation settles the question item-by-item and maximises what you can claim.

 

What is Depreciable? What is Not?

Basically, the IRD gives you three steps to follow.

Step 1: Is the item attached or connected (in some way) to the building? If no, then it is a chattel. If yes, then it possibly is not a chattel. However, if the answer is “yes”, don’t despair. Put away those tissues, dry your eyes and go to step 2.

Note: if the only connection is that the item is plugged or wired into an electrical outlet or socket or connected to a water/gas outlet, then that’s okay. That doesn’t count as being attached or connected, thus the item is a depreciable chattel.

Step 2: Is the item an integral part of the building? In other words, if you took it away, would the building be considered incomplete or unable to function? If “No,” then it is a chattel. Hooray! If the answer is “Yes,” then the item will be a part of the building, not a chattel. Again, there is more to it. If the answer is “No,” go to step 3. Do not pass go. Do not collect $200.

Step 3: Is the item built-in, attached, or connected to the building in such a way that it is part of the “fabric” of the building? Good question. You’ll need to consider factors such as the nature and degree of attachment, how hard it would be to remove it (e.g., removing tiles would be difficult), and whether there would be any significant damage to the item or the building if the item were removed (e.g., using the example of tiles, probably). So, if the answer is “Yes,” then the thing/item is not a chattel.

Worked Examples

Example 1: The heat pump A heat pump’s indoor unit is screwed to a wall, and its outdoor unit sits on a bracket or pad outside — but it’s only connected via electrical wiring and refrigerant lines, not built into the structure itself. Step 1: the only “connection” is wiring and pipework, which doesn’t count. It’s a chattel, and it’s depreciable, typically at a fairly high rate given how heat pumps age.

Example 2: Freestanding oven vs. built-in oven and hob A freestanding oven that simply plugs into a wall socket and sits in a gap in the bench is a chattel — it fails step 1 entirely (no real attachment). A built-in wall oven, by contrast, is fitted into a purpose-built cavity in the joinery, with the cabinetry built around it. That’s an integral part of the kitchen (step 2: remove it and the joinery is left with an unusable hole), so it’s treated as part of the building, not a separate chattel.

Example 3: Carpet vs. tiled or timber flooring Carpet and underlay sit loose over the subfloor, held by grippers rather than fixed to the structure — remove it and the floor is still complete and functional. It’s a chattel. Tiled flooring, on the other hand, is adhered directly to the subfloor and would need to be broken up to remove — that’s step 3’s “fabric of the building” test at work, and it fails as a chattel. It’s part of the building.

These examples show why the three-step test matters: two items that look similar on the surface (an oven, a floor covering) can land on opposite sides of the chattel/building line depending on how they’re actually fitted.

Summary

Getting the chattel/building distinction right is the foundation of a correct depreciation claim. The three-step test — attachment, integral function, and fabric of the building — will resolve the great majority of cases, and the worked examples above cover some of the most common ones investors ask about. Where an item genuinely sits in a grey area, that’s exactly the kind of detail a specialist chattels valuation is designed to nail down, itemising each piece with a defensible, IRD-ready valuation rather than leaving it to guesswork.

Still wondering about a specific item in your property? Read up on the underlying rules on the IRD website, or check the resources at Valuit.co.nz. Worried about depreciation clawback? See this article.

Get It Right, Get It Valued

Misclassifying even a handful of chattels can cost you real money at tax time. This could be either through under-claimed depreciation or a disputed claim down the track. If you’re not confident applying the three-step test to your own property, don’t guess! Please contact us and we’ll point you in the right direction. Meantime, see our guide on why you should get your chattels professionally valued to make sure nothing is missed.