Purchase price allocation

For sales of commercial property over $1M and residential over $7.5m.

Before 1/7/21 both vendor and purchaser could provide their reg. valuations at sale date and submit them to IRD. The depreciable portion of the asset could be vastly different having the effect that improvements/fitout could be revalued upwards allowing the useful life to have a new life and depreciated all over again.

Typically, the vendor would show the improvement/fitout at book value so there would not be any depreciation claw back and the purchaser would value the same assets at a higher value. Effectively this means that the assets will have a useful life for a much longer time than IRD had calculated.

Depreciation, in an accounting sense, is a concept that allows one to write off a portion of an asset for a sum $ which will get put in the piggy bank in order to save up so one can replace that asset. As the asset value is bought down to zero, you will be gearing up to empty the piggy bank and buy the new air conditioner, carpet, drapes or whatever it might be.

Then something happens, you sell the property. The purchaser then apportions the purchase price to allow those same assets that have a book value of zero to suddenly drink from the fountain of youth and be young and near new again. This asset which was old and decrepid is now a young and shining star with a high value and ready to be depreciated all over again over the following years.

The large chasm between what happens on the street and the government’s awareness of it, seems to have closed, at least in regards to this mis match of values. Investors have been mis-matching their improvement/fit-out values for decades and our previous right wing laissez-faire system has been fine, thank you very much.

It will be interesting to see how real estate agents handle this. The Agents typically have a fiduciary duty to their Vendor and a duty of care to the Purchaser. If the Agent does nothing i.e. does not negotiate the purchase price allocation at time of sale then he/she is working in the best interest of their vendor as the Vendor can determine the purchase price split unchallenged anytime within 2 months after the sale. This would conflict with the duty of care to the purchaser, so in order to balance this out, the Information sheet should be given to both parties and then leave that where it sits.