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Commercial Property Tax Depreciation

Commercial vs Residential Real Estate Depreciation

Ifyou are thinking of buying commercial real estate or are weighing up the options between buying residential real estate or commercial property you need to consider the tax depreciation allowances that are available for commercial property. There are some major differences from the allowances claimed on residential property and they can mean substantial savings to you.

Difference Number 1 – You can occupy the property and still claim tax 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 self-managed super fund then lease the property back to the business they own.

This enables the individual taxpayer or super fund to claim the depreciation allowance, which can be substantial. And best of all it’s totally legal!

Difference Number 2 – Older buildings qualify for the building allowance

Building allowance refers to the decline in value of the bricks, concrete etc of your property.

The date construction 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 18th of July 1985 to be eligible. See the graph above.

However, with commercial property, the building can be 3 years older and it still qualifies.

That is, construction of a commercial property needs to have commenced after the 20th of July 1982 in order to qualify.

Difference Number 3 – The items you can claim and at what rate also differ

Each year the Tax Commissioner publishes a list of what items you can and can’t claim.

Residential property owners have their own definitive list – detailing the items of plant and equipment that can be claimed.

For instance you can claim the decline in value of items like ovens, dishwasher & blinds against your taxable income.

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 Australian Tax Office recognises that carpets will wear and tear faster in a commercial property due to the high volume of people walking on them.

Some other differences include blinds – which according to the ATO last longer in commercial buildings and are to be claimed over 20 years as opposed to residential buildings where they are claimed over a 10-year period.

The latest Schedule of Effective Life is known as Tax Ruling TR 2009/4 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!

Lets do some Number Crunching

So how does commercial property stack up against residential in relation to depreciation?

There are some similarities between the two, for instance:

So using the Property Tax Depreciation Calculator* I have exported the following data:

Price & Type Year 1 Year 2 Year 3
$500k New Commercial Suite $12000 $10000 $9000
$500k High-rise Residential $13000 $11000 $9000
$500k Low-Rise Unit $11000 $9000 $8000
$500k Industrial Suite $9000 $8000 $7000

The results show that the depreciation in a commercial suite is somewhere in between a high-rise and low-rise residential apartment.

You will also get more depreciation on a commercial suite as opposed to a factory unit.

This is because a factory unit does not have as much plant and equipment and is nearly all made up of concrete and steel.

In summary

If you are the tenant in a commercial property, and think now might be a good time to become the owner/occupier – don’t forget to claim those tax depreciation allowances available to you as a landlord.

If the original costs of construction are unknown, instruct qualified Quantity Surveyor to estimate those costs.

*Results from the Washington Brown Commercial Property Depreciation Calculator may vary from time to time as the calculator is dynamic and changes with more properties inputted.