Can I depreciate the building on my rental property?

No. Since 2011, buildings with an estimated useful life of 50 years or more cannot be depreciated. This includes virtually all residential buildings. However, chattels and fit-out items within the property can still be depreciated.

Is it worth getting a depreciation schedule?

For most properties, yes. The cost of a schedule is typically $500 to $800, and it often identifies thousands of dollars in annual deductions. The schedule is itself tax-deductible.

What if I have been claiming depreciation incorrectly?

You should discuss this with your accountant. There may be options to correct past returns or adjust going forward. The IRD can reassess returns for up to four years, so accuracy is important.

Can I claim catch-up depreciation if I have not claimed before?

Not directly. You cannot go back and claim missed depreciation from prior years. However, your accountant can help set up your schedule based on current depreciated values and claim going forward.

Depreciation on Rental Properties NZ

Depreciation is a tax deduction that accounts for the wear and tear on assets over time. For rental property investors, understanding what can be depreciated and how to claim it correctly can reduce your taxable income and improve your after-tax returns.

While you cannot depreciate the building itself on residential property, there are many components within and around the property that you can claim. Getting this right requires understanding the rules and keeping good records.

The Building Depreciation Rule

Since 2011, buildings with an estimated useful life of 50 years or more cannot be depreciated for tax purposes. This effectively means residential buildings cannot be depreciated. The rationale was that land and buildings tend to increase in value over time, so allowing depreciation created a mismatch.

However, this rule only applies to the building structure itself. Items that are considered chattels or fit-out, rather than part of the building, can still be depreciated. This is where the opportunity lies for property investors.

What Can Be Depreciated?

Many items within a rental property qualify for depreciation. The key distinction is between the building (which cannot be depreciated) and chattels or fit-out items (which can).

Common Depreciable Items:

☐ Carpets and floor coverings
☐ Curtains, drapes, and blinds
☐ Appliances (stove, dishwasher, washing machine)
☐ Heat pumps and air conditioning units
☐ Hot water cylinders
☐ Furniture (if provided furnished)
☐ Security systems and alarms
☐ Fencing (depending on type)
☐ 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

Most investors use the diminishing value method as it provides larger deductions earlier. Once you choose a method for an asset, you should continue using it.

Example Depreciation Rates (Diminishing Value):

Carpets: 24% per year
Dishwashers: 20% per year
Heat pumps: 12% per year
Curtains and drapes: 12% per year
Freestanding stoves: 10% per year

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 is a detailed list of all depreciable items in your property, their values, and the annual depreciation amounts you can claim. This is especially valuable for properties you have purchased rather than built yourself.

Quantity surveyors specialise in preparing these schedules. They will inspect the property or review plans and specifications to identify all depreciable items. The cost of the report (typically $500 to $800) is tax-deductible and often pays for itself in the first year of deductions.

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

Items costing $1,000 or less can be fully expensed in the year of purchase rather than depreciated over time. This simplifies record keeping for smaller purchases.

For items between $1,000 and $5,000, you can choose to pool them and depreciate the pool at a standard rate, or depreciate each item separately. Your accountant can advise on the best approach for your situation.

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.

In practice, many chattels depreciate in actual value as well, so recovery is often minimal. But it is something to be aware of and plan for when selling.

Replacement Items

When you replace a depreciable item, you need to remove the old item from your depreciation schedule and add the new one. Any remaining book value of the old item can be claimed as a loss if the item was scrapped or sold for less than book value.

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

Depreciation deductions contribute to your overall rental profit or loss. If depreciation helps push your rental into a loss position, those losses will be subject to ring-fencing rules. This does not mean you should not claim depreciation, but it does mean you need to understand how all the pieces fit together.

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

Your accountant will typically maintain a depreciation schedule as part of preparing your annual tax return. Keep receipts for significant purchases and provide them when items are bought or replaced.

Depreciation on Rental Properties NZ

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Key Takeaways