Ask the Experts

PwC Partner Chris Leatham – February 2015

I have sold a commercial building that we have owned for 8 years and there is some depreciation to pay back on the sale. We had to sell it for a loss on what we paid for it to get a sale (the loss amounted to approx $30.000.00). My question is, can this loss on sale be offset against the amount of depreciation I have to pay back?

Yes, your loss on sale does effectively reduce your tax liability from depreciation claimed in the past.

Here’s an example of how it works. Let’s say you bought the building for $500,000 eight years ago and you claimed $50,000 tax depreciation over that period (and before the rules changed to deny depreciation on buildings from 2011). This means the building had a tax book value of $450,000 before any sale. Then you sell the building for $470,000, which is a $30,000 loss compared to the price you paid. This would give you $20,000 taxable income (your sale proceeds less your tax book value) due to depreciation recovery. So overall you’ve claimed tax deductions of $30,000, being the $50,000 tax depreciation claimed less the $20,000 depreciation recovery, and this reflects your loss on sale.

Of course, the tax outcomes are always very fact specific so here’s a few other things to think about.

In general, if you had sold the building in the above example for more than $500,000 then the gain (sale proceeds less cost) would be a tax free capital gain. But if you had sold the building for less than $450,000, there would be no depreciation recovery but you could not claim any further loss on sale. Further, when calculating your sale proceeds you can take into account costs of sale (for example legal costs, agent’s fees) and this may reduce your depreciation recovery on sale.

Also, you’ve referred to a building only. Any amount for the sale and purchase of property can be distributed between land, building and fit-out, and this can have a significant impact on the tax outcome, although you should make sure any allocation is fair and reasonable.

Overall, careful planning can sometimes give a better and legitimate tax result. Good luck with the next property!

As published by Fairfax in July 2015.

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