Depreciation: How it works for commercial property

You may be aware of the benefits of Tax Deprecation can have on an investors cash flow. Did you know that ATO statistics still show less than 40% of property investors take advantage of these allowances? 

All income producing properties such as rental property are entitled to Tax Depreciation allowances no matter what year they were built. The purpose of Tax Depreciation is to compensate tax payers who incur capital expenditure on depreciating assets (such as carpets, blinds) for the decline in value of those assets over their effective life.

Are you thinking seriously about investing in property but are torn between going commercial over residential?Commercial properties have generated lucrative incomes for many investors, so it’s definitely worth considering for your investment portfolio. And here are some of the reasons why.

1. You can claim depreciation while using your commercial property.

Leasing a commercial property you have purchased using your self-managed super fund is a strategy that works. In this case, the super fund or the individual taxpayer can legally claim the commercial property’s depreciation allowances, which benefits their commercial property investment. How is this possible? Well, the ATO doesn’t regard your commercial property as your principal place of residence even if you use it. 

2. Older commercial buildings get their share of allowances too!

Building Allowance can be explained as the drop in value of the materials that make up your property’s structure. This includes bricks, concrete and the like. In older commercial properties, the construction date makes or breaks the deal. You can claim building allowances if the following conditions are met:Construction began from:20 July 1982 – 21 August 1984: you are entitled to depreciate 2.5% of the construction cost.22 August 1984 – 15 Sept 1987: you can depreciate 4% of the construction cost.16 Sept 1987 onwards:  you can depreciate 2.5% of the construction cost.

3. Effective life and industry classification are 2 main factors to consider

Yearly, the Tax Commissioner issues a list of the items property owners can and can’t claim. This list, however, doesn’t apply to commercial property investors who can claim some items at different rates compared with residential claim rates. As an example, in a commercial property, carpets can be claimed over eight years while claiming the same item in a residential property takes 10 years. That’s because carpets in commercial properties tend to experience more wear and tear.The ATO has also determined a number of industry specific items for depreciation claims. For instance, a restaurant owner can claim items used specifically in the restaurant and food service industry.

Additional tips on saving taxes with commercial properties

Quality determines the depreciation allowances. High-quality commercial properties have higher depreciation allowances.Building height is a huge factor in determining how much the depreciation allowance should be. This is because taller structures tend to include more services like lifts, fire services etc, which translates to a higher value.

In cases where the actual construction costs cannot be determined, a qualified quantity surveyor must do the estimation.Use a property deprecation calculator to compare depreciation benefits when considering residential versus commercial investment properties.

Don’t exchange on a property before reviewing the capital expenditure forecast and the contract of sale. This will help ensure you maximise all available tax depreciation benefits.