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Commercial Property Depreciation: Image

Removing Depreciation in Commercial Property

The removal of commercial depreciation is now confirmed and implemented as of 1 April 2024.

Understanding Depreciation
Depreciation represents a decrease in the value of an asset over its lifespan. For commercial properties in New Zealand, this concept is crucial. It encompasses the decline in property value due to factors like wear and tear, ageing and technological obsolescence. Previously, the IRD set a predetermined rate to calculate depreciation for tax purposes, allowing property owners to deduct it as an expense annually over the asset's useful life. This accounting practice created a tax timing difference, where selling a property at or above its book value later translated the previously deducted depreciation into taxable income.

The Ever-Changing Landscape
The handling of building depreciation has always fluctuated. Before 2011, depreciation was permitted on buildings, before being halted from 2011 to 2020. In a turn aimed at aiding economic recovery during the COVID-19 pandemic, March 2020 saw the reintroduction of building depreciation.

What Does Removal Mean?
Eliminating depreciation eradicates the tax timing difference mentioned earlier. Depreciation deductions significantly reduced taxable income for property owners, affecting their overall tax bill. Without this deduction, the taxable profits for commercial property owners will lead to a higher tax bill. This increase in tax expenses diminishes the net returns for investors in the commercial property sector, impacting the attractiveness and viability of such investments.

The removal of this policy highlights the dynamic nature of tax regulations and how they affect commercial real estate. Property owners and investors must stay informed and agile, adapting their strategies to navigate these changes effectively.

Don’t hesitate to contact us for clarification or more information on how this policy change could impact you.

Commercial Property Depreciation: Text
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