Commercial Vs Residential Property … What are the Depreciation Differences?


THIS IS THE FIRST of a 2-part article, to help provide you with a useful comparison between the depreciation of Commercial and Residential property.

Investors considering purchasing an investment property will often enquire whether a Commercial or a Residential property will provide them with more deductions in the form of depreciation.

However, there are many important factors you need to be aware of when making a choice between these two investment options.

Types of Depreciation and How the Rules Change

Depreciation deductions apply to investment properties in two ways. Deductions can be claimed for the depreciation of the building structure known as a capital works deduction, and for the plant and equipment assets contained within the property.

In a commercial investment property, the Australian Taxation Office (ATO) investors can claim the available capital works deductions (structural items such as the bricks, building and roof) after the 20th of July 1982.

While in residential properties, capital works can only be claimed after the 18th of July 1985.

Depending on the age of the building, you can claim either 2.5% or 4% annually of the property’s historical construction cost for the capital works allowance.

Deductions for plant & equipment assets contained in both residential and Commercial properties will depend on the individual effective lives of each asset as set by the ATO.

However, the ATO does deem that some assets used in one commercial industry may be depreciated at a higher rate than they would in a residential property. One example is carpets, which will depreciate at a higher rate in restaurants and pubs … than in retail office buildings, or a residential dwelling.

Commercial Property Tenants

In Commercial properties, the ATO makes allowances for the tenants to be able to claim some depreciation for assets.

Commercial tenants are able to claim depreciation on any fit-out they add from the starting date of their lease. This can include assets such as desks, blinds, shelving, carpet, vinyl, fire fighting equipment and security systems.

If a commercial tenant removes items at the end of their tenancy and disposes of the item — they may also be able to claim the remaining depreciation for assets removed and scrapped, when they vacate the property.

However, if you decide to on-sell these items installed or keep them for future use, this does not apply.

In cases where items are on-sold, the tenant should always discuss this with their Accountant as this may have other tax implications.

It should also be noted that commercial building owners are also entitled to claim depreciation of assets installed and left behind by a previous tenant once a tenancy has ceased. It is important to contact a Quantity Surveyor to ensure that each party makes their claim correctly.

BOTTOM LINE: The rules for the depreciation of assets are different for Commercial and Residential property.

It’s always best to consult with a professional … to ensure that you are claiming all the deductions you are entitled to.

In Part 2, you will read about the rules for claiming occupancy in a Commercial/Residential property along with another useful tip when it comes to claiming deprecation the right way.


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