Dealing with the sale of a rental property with depreciating assets
The restrictions on residential rental property depreciation deductions also have a flow-on effect where a depreciating asset is the subject of a balancing adjustment event (i.e., when it is scrapped or sold as part of the disposal of the relevant rental property).
It is important to keep in mind that when dealing with the scrapping of, or more commonly the sale of a depreciating asset, any taxation analysis will need to be done on an asset-by-asset basis.
This will generally require an apportionment of the purchase and sale price of the property between the depreciating assets installed in the rental property at each of the respective times.
- Dealing with balancing adjustments when depreciation is not reduced under S.40-27
A taxpayer is required to separately account for depreciating assets upon sale (or scrapping) and calculate a balancing adjustment under S.40-285.
This is done by calculating the difference between the asset’s:
- termination value
- its adjusted value
- Dealing with balancing adjustments when depreciation is reduced under S.40-27
Where any depreciation deduction is denied (or reduced) under the new residential rental property restrictions in S.40-27 (i.e., because the asset was ‘previously used’), any balancing adjustment on its disposal will also be reduced by the proportion of the decline in value that was non-deductible as a result of this provision. Refer to S.40-291. Therefore, if no part of the decline in value can be deducted due to S.40-27, any balancing adjustment will be reduced to nil.