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Differences Between Commercial And Residential Property Depreciation

If you own your own business, are you currently leasing commercial space but thinking of buying your own premises? Or are you considering investing in your next property but can’t decide between a commercial or residential investment?

Commercial property has fared far worse than residential property in the years since the GFC and beyond. The number of transactions has plummeted. And those transactions that have occurred are well below the value of two to three years ago. So now might be the right time to go from tenant to master of your domain and buy that building from your landlord.

If this idea appeals to you, you’ll need to understand the tax depreciation allowances that are available to you as an investor of commercial property. There are some major differences from the allowances you can claim on residential property. Being aware of these may mean substantial savings for you.

Let’s have a look at these differences.

commercial and residential property

DIFFERENCE # 1: Owner occupiers can claim depreciation

With commercial property, you can occupy the property that you have purchased and still claim tax on depreciation. If you purchase a residential property to live in, you cannot claim depreciation on that property as it is not income-producing. But with commercial property, you can spend as much time in the office as you like and the ATO still won’t consider the office your principal place of residence!

A lot of people buy commercial property in their own name or through their self-managed super fund and then lease the property back to the business they own. This enables the individual taxpayer or super fund to claim the depreciation allowances, which can be substantial.

DIFFERENCE # 2: Allowances qualify on older buildings

The building allowance compensates investors for the decline in value of the bricks and concrete component of your property. The date when construction of your building commenced usually determines whether you can claim the depreciation of the structure against your taxable income. With residential property, construction must have commenced after the 18 July 1985 to be eligible for depreciation allowances. With commercial property investments, older buildings qualify for the building allowance.

A commercial property can be three years older and still qualify.

That is, construction of a commercial property needs to have commenced after the 20 July 1982 in order to qualify. On nonresidential properties the allowance is as follows:

Capital works allowances date

DIFFERENCE # 3: Items and rates differ for commercial and resident property

The items you can claim, and at what rate, also differ between commercial and residential properties. Each year the Tax Commissioner publishes a list of what items you can and can’t claim. Residential property investors have their own definitive list detailing the items of plant and equipment that can be claimed. Commercial property owners don’t have their own special list but some differences are pointed out in Table B of the Effective Life Schedule published by the ATO.

For instance, carpet in residential property can be claimed over a 10-year period. But in commercial property, carpet is claimed over an 8-year period. This is because the ATO recognises that carpets will wear out faster in a commercial property, due to the higher volume of people walking on them.

Some other differences include blinds. According to the ATO, blinds last longer in commercial buildings.  They are to be claimed over 20 years as opposed to residential property blinds where they are claimed over a 10-year period.

The latest Effective Life Schedule is known as Tax Ruling TR 2014 and also highlights industry-specific items. For instance, if your business is a restaurant, the ATO has a completely separate category of items you can claim. There is a very detailed list of businesses that are separated right down to pig farming! I suggest, if this is of interest to you, you should visit the ATO website, www.ato.gov.au.

About Tyron Hyde

Tyron Hyde is the CEO of Washington Brown Quantity Surveyors. He is regarded as one of the industry's leading experts in property tax depreciation, is regularly quoted in the media & asked to speak at conferences. Connect with Tyron on LinkedIn Watch Tyron Hyde speak at Washington Browns 40th Party