Is Hamilton Next?
3rd July 2013
As a property investor, with investment properties mainly in the Waikato, I have been watching the Auckland market with interest and have been wishing that I owned some central Auckland properties. But, there is a lot of information that points to Hamilton catching up!
Last Wednesday we held a free property seminar in conjunction with Lodge Rentals, Priority Home Loans and Lodge Real Estate, and I came away with some new insights into the Hamilton Market. The key to our seminars is information from a variety of experienced sources, and I find that with each seminar I personally learn something new from hearing the other speakers. Last seminar, it was a return on doing a rental up (see http://www.cswaikato.co.nz/blog/20-gross-yield-by-maximising-what-you-already-have/ ), and this seminar I learned a lot about the Hamilton market from Vaughan Heslop (Lodge Real Estate). Here is a little bit of what Vaughan discussed:
Comparing Hamilton to NZ
In the past, the Hamilton median house sale price always stays in line with the NZ median house sale price. In 2001 Hamilton started to get behind, but then caught up in 2004 to 2006. This and previous information that Lodge Real Estate have gathered shows that the Hamilton market lags the NZ market.
So in the current cycle, from 2010 the NZ median has increased but Hamilton has stayed consistent. As at 2013 the gap between NZ and Hamilton is the biggest it has ever been. No one has a crystal ball, but based on history the Hamilton market will start to catch up and have a strong growth period over the next few years.
So while Auckland seems very attractive at the moment, Hamilton should be next! This is quite encouraging for Waikato Property Investors.
Next Seminar
We are repeating the same seminar on 27th August (Tuesday) to help more property investors buy the right rental, and to stop people buying a “lemon”. If you are looking at buying a rental property, then I suggest you come along for the next seminar. We would love to see your friends and family too, and the seminar is completely free with no hard sell or hype.
http://rental.eventbrite.com/
Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?
Reducing Depreciation Recovery
25th June 2013
Should you just accept that you will have to recover all the building depreciation you have previously claimed? ……… NO
In many cases the building depreciation recovered is only a fraction of the total claimed and there are a number of ways to minimise it.
Below is a copy of our March 2012 article as we feel it has great value.
What is Depreciation Recovery?
In the past, property investors have been able to claim Building Depreciation. An investor may have purchased an investment property for $350,000 of which $200,000 is land, $125,000 is building and $25,000 is chattels like carpets and curtains that have been valued by a Valuit Chattels valuation. Most investors would have claimed 3% or 4% diminishing value depreciation on the $125,000 (or around $3,500 to $5,000) per year. They also would have depreciated the chattels at their respective depreciation rates. So over 5 years the investor may have claimed $20,000 of building depreciation, bringing the book value of the building down to $105,000.
In the past the IRD have given a deduction for the reduction in value of the building. If the building hasn’t been reducing in value, has increased in value or has reduced at a lesser rate, then the property investor has been over claiming building depreciation. They have been claiming a deduction which is perfectly legal and allowable, but that isn’t really occurring in their circumstances.
When the building is sold, an investor who has been over claiming this deduction, will then have to pay all or a part of it back again, which is depreciation recovery.
- Depreciation Recovery generally only applies to buildings.
- Chattels generally reduce in value at similar levels to IRD rates, therefore when the investment property is sold, there is no recovery. A chattels valuation could be obtained at date of sale to prove this.
Carrying on the example above, if the investment property is now sold 5 years later for $500,000. The chattels might be worth $10,000, the building $190,000 and the land $300,000. The building book value is only $105,000, so the $20,000 building depreciation claimed over the 5 years will be recovered and become taxable income. From $125,000 to $190,000 is a $65,000 capital gain, which is currently non taxable in New Zealand. In this example the difference between the real building value $190,000 and the book value $105,000 is large, so there would be full depreciation recovery with no chance of reducing. If the values are a lot closer, then there are a number of opportunities to reduce this.
How to reduce Building Depreciation Recovery
1) Make sure your accountant or the person calculating the recovery knows what they are doing. I have recently seen an example where an accountancy firm showed a recovery of $16,700 approximately when the recovered amount should have been $5,600 maximum. This is a difference of $11,100 taxable income, or at the 33% tax rate $3,663 extra tax paid for no reason. This is a great reason to use a real ‘property accountant’, someone who specialises in and understands property.
2) A starting point to establishing the building value is normally the rates valuation. From the rates information, work out what percentage is building and then apply this to the sale figure (less deductions!). If this figure is over your building book value, then there will be building depreciation recovery (presuming you have claimed building depreciation in the past).
3) If the rates figure and the book value are similar, you could look at writing a clause in the contract. The parties agree the building value is $XXXXX.
a. Example – The building cost $125,000 and closing book value is now $105,000 so $20,000 building depreciation claimed. The sale value is $300,000 and based on the rates valuation the building should be worth $112,500. The parties could write a clause in the contract, “The parties agree that the building value is $105,000”. As long as the two parties are not related, then this is the sale price.
b. You should not be too aggressive with this approach and the building value needs to ne reasonable.
4) Any legal fees for the sale will be claimable under the new legal fees deduction rules.
5) Any commission or other costs incurred for the sale need to be deducted from the sale price, before the building value is calculated.
6) If you are confident the building value is close to the closing book value, then you could obtain a registered valuation to prove this. We frequently do this for clients, as the rating valuations are not always realistic or are out of date. Recently a client saved over $20,000 in depreciation recovery, or over $7,000 in tax at the 33% tax rate, just by obtaining two valuations for less than a cost of $500.
Overall don’t just accept a depreciation recovery. Think it over, “has my gain come through land or building?” and “has my building really decreased slightly in value”, justifying any previous depreciation claims and meaning there should be little or no depreciation recovery.
Coombe Smith are property accountants and property experts in Hamilton, who help the Waikato property community and are proud to have property clients throughout New Zealand and the World. Do you need a property accountant to help with your rental properties?
