Depreciation recovery on rentals

Quick answer

Depreciation recovery happens when you sell an asset, such as a rental's chattels, for more than its depreciated (written-down) value. The depreciation you previously claimed is “recovered”, up to the original cost, and taxed as income in the year of sale. It applies to depreciable items like carpets, appliances and heat pumps, not to the building itself, which generally cannot be depreciated.

The detail, in plain English

While you own a rental, you can claim depreciation on its chattels, reducing each item's book value over time and giving you deductions year by year. When you sell, IRD checks whether you effectively sold those items for more than their reduced book value.

If the apportioned sale value of a chattel is above its written-down value, the gap, capped at the depreciation you actually claimed, is recovered:

Here you effectively sold for $2,500, which is $700 above book value, so $700 of the depreciation you claimed is added back as income. You never recover more than you claimed; if a chattel somehow sold above its original cost, that excess is a separate capital question, not recovery.

Because buildings are generally non-depreciable now, recovery mostly bites on chattels. The practical sticking point is the apportionment of one lump-sum sale price across land, building and chattels: a sensible, defensible split is what determines how much recovery arises, so the chattels schedule you keep while you own the property does real work at sale time.

A simple example

Sefina sells her rental. Over the years she claimed $9,000 of depreciation on the chattels (oven, carpets, heat pump). When the sale price is apportioned, those chattels are valued above their written-down total by $5,500. That $5,500 of past depreciation is recovered and taxed as income in the year of sale, sitting on top of any bright-line gain.

It is a real bill on deductions she has already enjoyed, in effect IRD asking for some of those earlier tax savings back because the chattels held their value. Had she kept a clear chattels schedule and a realistic split, the figure would have been predictable rather than a year-end shock.

Common mistakes to avoid

• Forgetting recovery entirely. Owners focus on the bright-line gain and overlook the chattels clawback.
• Not apportioning the sale price. Lumping everything into “the property” hides the chattel values that drive recovery.
• Assuming the building is in play. Buildings are generally non-depreciable, so recovery is about chattels.
• Keeping no chattels schedule. Without one, you cannot show what was claimed or defend a sensible split.
• Leaving no cash for it. Like bright-line, recovery is taxed in the year of sale.

Where this fits in your return

Recovered depreciation is added to income on your IR3 (or the company's IR4) in the year of sale, often alongside a bright-line gain. Together they can make the sale year's tax much larger than a normal rental year, which then feeds into next year's provisional tax. See claiming chattels depreciation and tax when selling a rental for the full cycle.

How Fernway can help

We keep an accurate chattels schedule while you own the property, apportion the sale price sensibly across land, building and chattels, and calculate the recovery so you know the tax before settlement. That way the deductions you claimed along the way do not turn into a nasty surprise when the property changes hands.

This is general information only, current at the time of writing, and not personalised tax advice. Tax rules change and your circumstances may differ, so confirm your position with us or check ird.govt.nz before you act on it.

In plain English: the depreciation you claimed on a rental's chattels can be clawed back and taxed when you sell, so budget for it before the sale goes through.