Depreciation law change could mean big savings

For many owners of rental properties, the year ending 2012 will be the first tax return they will file under new depreciation laws.

Depreciation no longer applies to buildings and depreciation loading, which increased depreciation rates by 20 per cent, cannot be applied to new assets acquired after May 20, 2010.

For a building worth $200,000, which had previously been depreciated at 3 per cent a year, this could mean a difference in tax deductions of $6000 this year or tax of $1980 at 33 per cent.

Don't think you can get around the depreciation rules by splitting the building into different parts - the IRD won't buy it.

They consider that once an item has been identified and depreciated it cannot be separated out into many smaller items in your asset ledger.

It's a good time to take stock of your rental investments and, if you are thinking of buying another, work out whether it still stacks up without this tax perk.

In many parts of the country, it is now possible to buy positively-geared investment properties - that is, investments that return more to your pocket than they cost to own.

Be careful about taking on any negatively-geared property.

It might reduce some of your tax bill, but you have to be very confident that you can comfortably cover extra losses if it cannot be tenanted and expect capital gains when you need to sell.

Good questions to ask when considering a rental property as an investment are whether it is near a school, what kind of condition it is in, the sales history for the area, how much maintenance you are likely to have to do and whether you can do that yourself. Landlords who are on wages and salaries can apply for a special tax code if they envisage a loss coming from their rental property investments.

This will give them more in each pay packet to help cover a top-up for their rental.

It's a much better idea to have the funds in your pocket each pay period rather than wait for a tax refund.

Look through companies or LTCs have now replaced the LAQC company, which was used to contain rental property portfolios.

I often get people looking at the LTC regime asking whether they can claim the interest in a new look-through company set up to purchase the old family home, which is then geared up and rented out, with the funds used to pay for the new family house.

This is possible, but it is important to watch the loss limitation rule (a calculation is applied here), which is in place to ensure owners can only offset losses reflecting an economic loss.

Jeremy Tauri is an associate at Plus Chartered Accountants.