Depreciation

Depreciation is a tax deduction that allows businesses and property investors to spread the cost of assets (machinery, vehicles, equipment, furniture) over their useful life rather than claiming the full cost in the year of purchase. IRD publishes approved depreciation rates for thousands of different asset types.

For rental property investors, depreciation applies to chattels and fixtures within the property — things like carpets, curtains, appliances, and heat pumps — but not the building structure itself. Commercial and industrial buildings can be depreciated. Correctly claiming depreciation can significantly reduce taxable rental income.

There are two methods: diminishing value (DV), where the deduction decreases each year as the asset's book value falls, and straight line (SL), where the same amount is claimed each year. DV generally gives larger deductions in earlier years. When you sell a depreciated asset for more than its book value, you may need to pay depreciation recovery income.