IMPORTANT – “SALE/PURCHASE PRICE ALLOCATION”
Depreciation rules are always changing and this rule requires you to agree to additional information within the Sale and Purchase Agreement. In its simplest form you will be required to agree on the allocation between LAND (non-depreciable property) and IMPROVEMENTS (Depreciable Property) within the agreement. The allocation will be used to determine the “closing book value” of improvements for the vendor and the corresponding “opening book value” of improvements for the purchaser.
Understanding the “Purchase Price Allocation” rules (PPA)
We cannot stress enough the IMPORTANCE of taking professional advice on this as soon as possible in the Sale and Purchase process. This is for both VENDORS and PURCHASERS. Getting this right OR wrong can be the difference in tens, or hundreds, of thousands of dollars.
Thinking of BUYING or SELLING, please get in contact now.
Just SOLD or PURCHASED, please get in contact now, advice is free.
PPA – Satge 1 – Sale and Purchase contract
Stage 1 will be raised by the Real Estate Agent and is to formalise between the Purchaser and Vendor, an agreement for the allocation of the purchase price to
- “depreciable” and
- “non depreciable” items.
- TAKE ADVICE before agreeing to any figures here.
PPA – Stage 2 – VALUIT Commercial Max
Stage 2 is to further split the value of “depreciable” items into all of the individual asset categories for depreciation to maximise your deprecaition. This is our COMMERCIAL MAX Service. This is completed at any stage before OR after settlement.
- Depreciable Property
- Buildings
- Plumbing
- Electrical wiring ……..and much more
- Depreciable Property
Unlock the Value of Your Commercial Property with a PPA. As a recent purchaser of commercial property, you’ve made a substantial investment. But are you fully aware of the tangible and intangible benefits that a STAGE 2 Purchase Price Allocation (PPA) can bring to your investment?
Why a PPA is Essential for Commercial Property Owners. A Purchase Price Allocation (PPA) goes beyond being a mere requirement for commercial property owners; it serves as a financial strategy that can yield significant benefits. Firstly, a PPA enables the identification and separation of the value of depreciable and non-depreciable assets. Moreover, at PPA STAGE 2, the COMMERCIAL MAX ensures the segregation of depreciable assets, thereby maximizing depreciation and the resulting cashflow advantages.
Maximise Your Tax Benefits with a PPA. Secondly, a PPA can provide significant tax benefits. By accurately separating and identifying your assets, a PPA allows you to depreciate assets over a shorter period, potentially leading to significant tax savings.
STAGE 1 PPA – Key points.
- A Purchase Price Allocation (PPA) requirement was introduced on 1 July 2021 which is causing confusion in the market.
- It is important that RE Agents are aware of the potential ‘depreciation recovery’ implications to both parties which should be taken into consideration when drawing up a contract.
- There are differing views between the IRD and REINZ on how the PPA rules are managed, and it is best practise for all parties to agree allocation in the sale and purchase agreement before settlement.
- If no agreement is reached, then different scenarios may arise depending on who makes the determination – e.g who can benefit from claiming depreciation or experience losses due to limitations to claim depreciation.
STAGE 1 PPA – Sale and Purchase Agreement – Timing is everything.
VENDOR
- Agree with purchaser BEFORE settlement OR
- Vendor may allocate values in the 3 months following settlement OR
- Purchaser may allocate values in the 4-6 months following settlement (NOT IDEAL) OR
- IRD will decide (NOT IDEAL)
PURCHASER
- Agree with Vendor BEFORE settlement OR
- Vendor may allocate values in the 3 months following settlement (NOT IDEAL) OR
- Purchaser may allocate values in the 4-6 months following settlement OR
- IRD will decide (NOT IDEAL)
Most imprtantly – once the PPA has been agreed (Stage 1) there is the opportunity to further split the items to ensure depreciation is maximised (Stage 2).
STAGE 2 PPA – VALUIT Commercial Max
PURCHASER – Once property has settled.
- Contact the team at Valuit to discuss the opportunity of maximising your depreciation.
QUESTION – If I need to complete an assessment in accordance with the Purchase Price Allocation (PPA) rules, then my accountant will surely advise me. Is this correct?
ANSWER – It is important to note that relying solely on your accountant’s advice may not be sufficient. Accountancy is a vast field, and not all accountants may be fully up-to-speed on PPA rules. The benefits of complying with PPA rules are substantial, and therefore we recommend that the purchaser takes the initiative to understand and comply with these rules rather than waiting for direction from their accountant. Our team at Valuit Asset Appraisals Limited can provide expert guidance and support in this area to ensure compliance with PPA rules, enabling you to maximize the benefits of your investment in commercial property.
QUESTION – Is it worthwhile completing a PPA Stage 2 – Commercial Max, if I will only have to pay it back through Depreciation recovery?
ANSWER – Absolutely, completing a Stage 2 PPA assessment is highly recommended for purchasers of commercial property. In fact, since 1 July 2021, the majority of sales are required to include PPA assessments. While it’s true that you may need to pay back some depreciation in the form of depreciation recovery when you sell the property, completing a Stage 2 PPA assessment can actually help to minimize this. By having clear book values for your assets, you will have a solid basis to form an agreement on values with a purchaser when the time comes to sell. This can help expedite the process and ensure a smoother transaction overall.
At Valuit Asset Appraisals Limited, we specialize in providing comprehensive assessments and valuations to ensure compliance with IRD regulations and maximize the benefits of your investment in commercial property. Our team of experts is here to assist you every step of the way and provide you with clear, concise, and authoritative information. We encourage you to take action and get started on your PPA assessment today to benefit from having more information at your disposal when you decide to sell.
QUESTION – Why is an additional split of the purchase price necessary when the government may remove building depreciation?
ANSWER – This is why a full Purchase Price Allocation (PPA) is essential. A PPA will split out items from the building structure, fixtures and fittings, such as plumbing, flooring, electrical, partitioning, etc. These items all depreciate at differing rates. Without a PPA, if the government removes building depreciation, you will not get any depreciation benefits. Therefore, it is important to have a PPA assessment to ensure that you are aware of the book value of assets in your commercial property investment. Valuit Asset Appraisals Limited specializes in providing comprehensive assessments and valuations to ensure compliance with regulations and maximize the benefits of your investment. Get in touch with us today to learn more.
QUESTION – Why do I need Valuit Asset Appraisals Limited if there is already a Purchase Price Allocation in the agreement that has been signed?
ANSWER – Even if there is already a Purchase Price Allocation (PPA) in the agreement, it can be beneficial to have an expert review of what has been agreed upon. At Valuit Asset Appraisals Limited, we can provide recommendations on how to maximize your return. Most PPAs will have very little detail, and it is the detail that we can add in the form of further splitting the values into items of depreciable property where the real value is achieved.
It is important to note that while the building structure itself depreciates at a very low rate of 2% diminishing value per annum, other items such as carpets, flooring, electrical, plumbing, etc., all depreciate at much higher rates and provide significant cashflow benefits. By conducting a comprehensive assessment and valuation, we can help you understand the true value of your assets and identify areas where you may be able to increase your returns. Get in touch with us at Valuit Asset Appraisals Limited to learn more about how we can help you maximize your return on investment.
Trust Valuit Asset Appraisals Limited for Your PPA. At Valuit Asset Appraisals Limited, we are experts at conducting PPAs. Our team of professionals will ensure that you not only meet your PPA requirements but maximise the financial benefits as well.
Invest Wisely, Reap the Rewards. A PPA is a powerful tool in a commercial property owner’s arsenal. It’s not just about meeting a requirement, but about unlocking the hidden value within your investment. So, take the step today to fully understand and utilise your commercial property’s potential with Valuit Asset Appraisals Limited.
IMPORTANT – This is just an overview and sometimes a little knowledge can be dangerous. We cannot stress enough the IMPORTANCE of taking professional advice on this as soon as possible in the Sale and Purchase process. This is for both VENDORS and PURCHASERS. Getting this right OR wrong can be the difference in tens, or hundreds, of thousands of dollars.
Thinking of BUYING or SELLING, please get in contact now.
Just SOLD or PURCHASED, please get in contact now, advice is free.
The calculator below utilises the IRD formula to calulate the ALLOCATION between “LAND” and “DEPRECIABLE PROPERTY”.
