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.