Disclaimer:
This article provides general information only and does not constitute financial, legal, tax, or investment advice. Property investment involves risk. Always do your own research and seek personalised advice from qualified professionals before making investment decisions.
Key Takeaways
- Building depreciation is currently set at 0%; separately identifiable depreciable chattels may use an applicable Inland Revenue rate.
- Whether an item is separate depreciable property depends on the asset and how it is installed; use Inland Revenue’s current classification and rate guidance.
- The IRD sets depreciation rates based on asset type and expected useful life.
- An asset schedule needs supportable classifications, values, dates, methods and current Inland Revenue rates; no report guarantees a deduction.
- Allowable depreciation affects rental deductions; a disposal can create an income adjustment or loss based on the asset’s adjusted tax value and disposal value.
Depreciation spreads the tax cost of qualifying assets over time. For a rental property, a deduction depends on the asset classification, business-use percentage, cost or adjusted tax value, method and current Inland Revenue rate; it does not guarantee a better after-tax return.
Building depreciation is currently set at 0%. Some separately identifiable chattels may be depreciable, but items forming part of the building may not be treated as separate assets. Keep evidence supporting each classification and value.
The Building Depreciation Rule
Inland Revenue says depreciation was allowed on most buildings until 2011, was reintroduced for non-residential buildings for the 2021–2024 income years, and returned to a 0% rate for non-residential buildings from the 2025 income year. Residential building depreciation remains unavailable under the current settings.
A separately identifiable chattel may use the applicable rate, while an item that forms part of the building may not be separate depreciable property. Inland Revenue’s item-of-property guidance and residential-rental chattels determination should be applied to the actual installation.
What Can Be Depreciated?
Some rental-property items are listed as depreciable chattels, but classification is asset-specific. The relevant distinction is whether the item is separate depreciable property or part of the building, not simply whether someone calls it a chattel or fit-out.
Common Depreciable Items:
- ☐ Carpets and floor coverings
- ☐ Curtains, drapes, and blinds
- ☐ Appliances (stove, dishwasher, washing machine)
- ☐ Some air conditioners and heat pumps, depending on type and installation
- ☐ Some water-heating assets, using the applicable asset class
- ☐ Furniture (if provided furnished)
- ☐ Some alarms and security assets, depending on classification
- ☐ Fencing only where current Inland Revenue guidance supports separate depreciable-property treatment
- ☐ Garage door openers
Items That Cannot Be Depreciated:
- ☐ The building structure itself
- ☐ Land
- ☐ Items that are part of the building fabric
- ☐ Items with an unlimited life (certain fixtures)
Depreciation Rates
The IRD publishes depreciation rates for different asset types. These are based on the expected useful life of the asset. There are two methods:
- Diminishing value: Higher deductions in early years, decreasing over time
- Straight line: Equal deductions each year over the asset's life
Inland Revenue permits diminishing value or straight line. You do not have to use one method for all assets, and may change methods at the end of an income year using the adjusted tax value. Choose and document the method without assuming one is best for most investors.
Example Depreciation Rates (Diminishing Value):
- Carpets: check the current Inland Revenue rate for the acquisition date and method
- Dishwashers: check the current Inland Revenue rate for the acquisition date and method
- Heat pumps: rate and classification depend on the equipment type and installation
- Curtains and drapes: check the current Inland Revenue rate for the acquisition date and method
- Stoves: check the current Inland Revenue rate for the acquisition date and method
Rates can change, so always check the current IRD depreciation rate finder or consult your accountant for accurate rates.
Getting a Depreciation Schedule
A depreciation schedule records the assets treated as depreciable, their supported values, dates, methods, rates, annual claims and adjusted tax values. A purchased property may require a supportable allocation; the schedule itself does not determine that every listed item is claimable.
A suitably qualified professional may help identify and value assets when records are incomplete. Ask what evidence and Inland Revenue classifications support the schedule, obtain a scoped quote, and confirm the report fee’s tax treatment. No fee range, deduction or first-year payback is universal.
For newly built properties, you may already have detailed records of what was installed and the costs, making it easier to set up depreciation schedules yourself or with your accountant.
Low Value Assets
From 17 March 2021, Inland Revenue’s low-value threshold applies to assets costing less than $1,000, subject to the low-value-asset conditions. Assets costing exactly $1,000 are not within the wording of that threshold.
Inland Revenue allows eligible low-value assets to be pooled. Once included, they cannot be removed; the pool uses diminishing value and the lowest depreciation rate among its assets, and buildings cannot be pooled. Do not infer a general $1,000-to-$5,000 pooling band.
Depreciation Recovery on Sale
If you have claimed depreciation on an item and then sell it for more than its depreciated value, you may need to pay back some of the tax benefit. This is called depreciation recovery or depreciation clawback.
Example:
You buy a heat pump for $3,000 and claim $1,500 in depreciation over several years, leaving a book value of $1,500. If you sell the property and the heat pump is valued at $2,000, you have depreciation recovery income of $500 ($2,000 minus $1,500), which is taxable.
The disposal adjustment depends on the asset’s adjusted tax value and disposal value. Do not assume recovery will be minimal; include the supported gain or loss in the return for the disposal year.
Replacement Items
Record the disposal of the old asset and the acquisition of the replacement separately. Inland Revenue requires any supported disposal loss or gain to be included in the relevant return; pooled assets and private-use proportions have separate treatment.
Keep records of what was replaced and when. This is important for both tax purposes and for tracking the condition of your property over time.
Impact on Ring-Fencing
Allowable depreciation is included in the rental deduction calculation, and residential excess-deduction rules may restrict when a resulting loss can be used. Apply the current rules to the taxpayer’s property or portfolio basis.
Record Keeping Requirements
To claim depreciation, you must have records showing:
- What items you are depreciating
- The original cost or value when first used for rental
- The date first used for rental purposes
- Depreciation rates and methods used
- Annual depreciation claimed
- Current book value
Keep rental-property records for at least seven years, including asset receipts showing purchase value and date. Depreciation records should also show annual depreciation, adjusted tax value and amounts recovered on sale; provide complete records to whoever prepares the return.