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Tax Depreciation

Knowledge is power, and when your assets are involved you need the right answers. Our JLL valuers have extensive knowledge of the tax rules as well as valuation skills.

Tax Depreciation Cost Allocations

From the 2012 tax year the depreciation rate for buildings was reduced to zero; however, fit-out and services may still be depreciated if separated in the books. Fit-out and services can be up to half the cost of improvements depending on the type and age of the building. Fit-out/Services depreciation rates average out at around 10% overall for typical buildings, so there are substantial tax benefits available.

For an existing 'second-hand' property purchase, the property cost must be separated between non-depreciable land and building structure and depreciable fit-out by means of a market valuation. That's where JLL's valuers come in. This type of work requires an extensive knowledge of the tax rules as well as valuation skills.

For new builds, or fit-outs (tenant or landlord), the project cost documents can be used as the basis for an asset register once the costs have been categorised into the IRD asset classes. Related costs such as tenant relocation costs and leasing incentives also need the correct tax treatment. This is also where JLL's expertise is valuable. 

Sale Price Allocations

When investment properties held on capital account are sold, it is necessary to allocate the sale price between the land, building structure and fit-out/services in order to calculate depreciation recovered (treated as taxable income). 

Depreciation recovery is the lesser of:

Sale Price less Closing Book Value, or;

Original Cost less Closing Book Value

Gains on sale of land are capital (non-taxable), but losses on sale for fit-out/services are tax-deductible.

When these calculations are carried out line by line, for individual fit-out/services, the depreciation recovery is usually less than when it is based on summarised values. Sometimes a market valuation can identify deductible losses on sale for fit-out/services – especially if fit-out is made obsolete by changes in zoning or the type of building in demand. Apportionments based on book values are now unlikely to be accepted by Inland Revenue.