What happens when I sell my rental? What is Depreciation Recovery?

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Depreciation Recovery (or Depreciation Clawback) occurs when:

  • You terminate the tenancy and stop renting
  • You move back into the rental property
  • The rental property is sold
  • The house burns down – And it happens!

It’s quite likely, with the current property boom, that when you sell your rental property it will be sold at a profit, when the sale price exceeds the original cost price.  Depreciation recovery represents the total amount of depreciation that many landlords would have claimed as a tax deduction on the building, in each prior financial year up until the 2012 year.   After which time, 0% deprecation has applied to building structures.  In the case of a capital profit the tax on this depreciation expense may have to be paid back because the property’s building value, has in fact increased, rather than depreciated.

So unless you can show the increase in property value was attributed to the land value, rather than the building value, you will have to recover and pay the tax back, up to the full amount of depreciation you have claimed previously.

Factors that will have an effect on this are things like Real Estate fees, Legal Fees, advertising costs on the sale, a change in land values, improvements/alterations, chattel values etc.

And no there is no truth to the rumor that you do not have to repay depreciation if you have owned the property for more than 10 years.  There is no time limit on depreciation recovery.

15 Comments

  1. John van Heezik 2019-04-13 at 13:39 - Reply

    Thanks for this information, it makes it clear what I will need to add to taxable income on my tax form when I eventually sell my investment property. The IRD site is deceptive saying you may not have to pay tax on the sale of your rental property if it is a long term rental. It also states if your original reason for buying was not to sell for profit, you won’t be taxed. Also, if the property was originally your home, you wouldn’t be taxed.Their site does state to contact a tax agent though and when I rang IRD up,they also said to contact an accountant. I do my IRD tax form calculations on my investment property myself and this little bit of information will be very helpful in the future when i sell my investment property.
    John van Heezik.

  2. Tony 2019-05-09 at 11:51 - Reply

    I have been reading your Depreciation Recovered. At the bottom you state things that can alter the amount to pay including improvements/alterations. Does introduced capital to improve the value of the property come into the calculation for the values when selling.

    • Storey Associates 2019-05-10 at 10:55 - Reply

      The short answer is yes. This is a complex formula involving changes in values of land, building, chattels, selling costs and capital improvements.

  3. Henry Yee 2019-05-29 at 12:16 - Reply

    In terms of moving into your rental property
    How soon do you have to pay back depreciation.
    And as per your post,is it the whole lot or a percentage,
    As there is also a myth that a certain Portage is only needed.

    Many thanks on a good post

    • Storey Associates 2019-06-05 at 09:09 - Reply

      If there is depreciation clawback to repay to IRD, this must be paid on 7 Feb or 7 April (depending on your Tax Agent Status) in the year following the tax year in which you moved into your rental property. The amount can be all, part, or none of the depreciation claimed depending on Land, Building and Chattel values, selling costs (Real Estate, advertising and Lawyers) and improvements. You pay the tax on the amount of the clawback, based on your marginal tax rate ie 10.5% to 33%.

  4. John 2019-11-17 at 12:30 - Reply

    I bought my investment property in 2005. I am in the process of selling it. My accountant advised I claimed depreciation totaling 104k. Being on the higher income bracket (33%) this benefited me for a total of $33.4k.

    On sale of the property will I need to pay back all $33.4k?

    • Storey Associates 2019-11-18 at 07:48 - Reply

      You may not necessarily have to pay back the depreciation, however it is likely to be the case. There is a formula involving changes in the values of land, building, chattels, selling costs and capital improvements which needs to be calculated to determine this. The amount can be all, part, or none of the depreciation claimed depending on the aforementioned factors. You pay the tax on the amount of the clawback, based on your marginal tax rate.

  5. Tricia Carmichael 2020-04-09 at 12:32 - Reply

    Hi, we purchased a property to rent to our daughter in 2008 and claimed depreciation in the initial years. We have now moved into that property ourselves so are wondering how to enter it on our 2020 return and include the adjustments for Depreciation. I have printed out the IR833 Property sale information, but this doesn’t look like it applies to depreciation but stated on IR3 2020 you need to fill this in if you want to include depreciation as income from Property Sales. Also we usually fill out an IR10 for our income/expenses but ceased renting the property at the end of the last financial year and just had it empty until we moved in. Do I still need to fill out anything on the IR10? I would really appreciate any advice as do the paperwork myself when it’s straight forward but confused on this one.

    • Storey Associates 2020-06-03 at 14:31 - Reply

      Hi Tricia You have been fortunate to have filed your own returns on a year to year basis up to this point however we recommend you consult an accountant to assist you with the final return.

  6. Rue 2020-05-29 at 13:00 - Reply

    This page has a great set of answers, thanks!

    Am managing two houses for family (one a family home but rented out since 2016 while parent moves in with us and the other bought in 2018 as a retirement home for ourselves but rented out in the meantime – where we are would become a holiday house). Both are 1960s houses and have not been significantly renovated since building. We did occasionally buy a few things like curtains but they were inexpensive so put them down as expenses (they were directly replacing worn out curtains), ditto a cracked sink and a leaky shower stall etc.

    Have been able to manage the tax easily enough until now as the forms said depreciation is optional – so we’ve never claimed any depreciation for anything.

    Every advice online says we should have got a chattels valuation within 6 months of purchase but one property we didn’t purchase and the other we didn’t think about chattels before renting out a few years ago. Because we’ll be charged for the depreciation on chattels when we stop renting it out as if we had claimed depreciation for them? Is that true?

    Given that everything we have done is repairs, maintenance (eg painting) or replacement like for like, and the value of the chattels is not great and is reducing, do we really need to go through the process of depreciation? Or making a full chattels list and valuation just to declare that we aren’t going to claim depreciation?

    • Storey Associates 2020-06-03 at 14:40 - Reply

      Yes it would have been beneficial to have had a chattel valuation carried out in the first tax year.
      No you wont be charged for the depreciation on chattels when you stop renting it out, because you haven’t claimed it in the past and it also cant be clawed back as is the case with building depreciation.

  7. Kim 2020-06-02 at 19:46 - Reply

    A very good post.
    What if we purchased a rental which has got all good condition chattels in it. Do we generally consider first year depreciation is zero?
    Ah, I understand asking a professional is possibly the best idea and getting no fees advises are very unlikely happening. I will just chip in one more quiz….
    If the rental is owned by husband and wife, do we need to inform IRD the Joint Tenancy situation on the Title?

    Thanks heaps!

    • Storey Associates 2020-06-03 at 15:00 - Reply

      You could obtain a chattel valuation from a regd valuer then claim depreciation at the rate set by IRD – some chattels are depreciated at zero but not all.
      If the property is joint ownership, both parties must declare the taxable income to IRD in direct relation to the ownership, in their tax returns. Your lawyer will advise IRD of the ownership of the property on purchase date.

  8. diana craig 2020-08-20 at 22:40 - Reply

    hi , Im utterly clueless in regards to this clawback penalty. Ive just been told that I have to pay $16000 in clawback depreciation by my accountant, big surprise. I bought my home back in 1996 ,lived in it for several years, then moved to another city. The house is in a trust and have had it rented. I have returned to the rental on occasion and now I am back and have been living here since 1 november and probably will stay on as I rent my other house to generate a bigger cashflow, as I am not working because of cancer treatment and due costs. Most of this is probably irrelevant, but wanted to paint a picture as the trust might be of interest. Does this have to be paid all at once. Is this a one off payment. What if I move out next year? What happens to the the other house if I move back in , do I get charged clawback on that too? I don’t have a intention to sell the houses , or one or the other at the moment, even though moving back to the rental doesn’t exclude me from paying the clawback. With my medical issues, I am up in the air as anything can change on a dime, would I have to pay twice on sale of property. . Would really appreciate your reply thanks

    • Janine 2020-08-21 at 13:49 - Reply

      Firstly, you mention the “clawback to pay is $16,000”. This could be interpreted as one of 2 things – Depeciation Clawback of $16,000 where the actual tax to pay on that would be say $3,200. Or the $16,000 could be the tax to pay on Depreciation Clawback of $80,000, however this is unlikely. Therefore I believe the tax to pay would more likely be around $2,400 to $3,200 depending on your effective marginal tax rate.
      In either case, this is a one off – you only pay the Clawback tax back once and it won’t be due until 7 April 2021.
      If you rented the other house out after 1/4/11 there will be no Depreciation Clawback on this property.
      Remember that this is a complex formula and a good accountant will include all components in the calculation. Depreciation Clawback is not always a given.

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