Depreciating Your Commercial Property

Commercial assets are considered to lose value as time passes and in tax purposes, you would want to quantify this loss. This investment structure helps calculate appropriate values. Different commercial properties have different characteristics and therefore different depreciation rates. Commercial property depreciation is ultimately tied to buildings which have a finite life, unlike the land element of any property investment. The standard well-known street shop unit in good and promising locations within major cities or towns has a very high land content in its value. It is not unusual to see buildings hundreds of years old standing next to modern buildings on the high street and given the uniformity of shop fronts it is hard to even notice the age gap. Yearly depreciation and capital expenditure rates for well-known street shops are therefore very low. Offices on the other hand are less location sensitive, have a higher building content relative to land value and have a relatively short life, with high levels of expenditure during that short life. The rules about flexibility for investors are to maximize their depreciation allowance in the short term when renovating an commercial property. For instance, although there are aesthetic reasons to choose a certain type of floor covering, the more important consideration may be how much of a deduction for depreciation of commercial property is allowable in the short term.

The outcomes of each calculation method are very different, and so the choice of calculation will come down to factors such as:

• The duration of time you wish to hold onto the property
• Whether you intend to occupy the commercial property as your primary place in initial years or later years
• Whether deductions on your assessable income are more valuable in the short term or the long term.

The Diminishing Value method tends to be the most popular since it can achieve higher short-term deductions, therefore maximizing the benefit where an investor sells a property. However, there are circumstances where the Prime Cost method may be more beneficial, for example if you wish to minimize tax deductions in the first years of property ownership given your financial situation. A further example of where Diminishing Value may be better is if the property is initially used as your primary place of residence. In this instance you could not claim depreciation in the first years of asset ownership, and therefore it would be better to maximize deductions later in each asset. It is important to seek advice from a registered taxation agent on these issues. Once a method of calculation is used it must continue to be used for the assets. Simply put depreciation increases an investor's cash return for residential and commercial property. One of the main obstacles for investors is managing cash flow for their investment. Tax depreciation schedules assist in maximizing your cash return from an commercial property. As a commercial building gets older and items within it wear out they are subjected for commercial property depreciation.