As an investor, when considering the differences between residential and a commercial property how do you ascertain which one provides greater deductions in the form of depreciation.

We spoke to the team at BMT Tax Depreciation about the major differences between depreciation for commercial property and residential property to find out what attracts the greatest deductions.

BMT explained, " 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 deductions, and for the plant and equipment assets contained within the property.”

Dates for claimable capital works:

In relation to commercial investment property, the commencement date the Australian Taxation Office (ATO) allows investors to claim the available capital works deductions for commercial property is the 20 July 1982 and for residential property is 15 September 1987.

Deductions for plant and equipment assets:

“The deductions for plant and equipment assets contained in both residential and commercial properties will depend on the individual effective lives of each asset as set by the ATO. In the case of residential properties, it also depends on the purchase date of second-hand properties.” However, the ATO does deem there are some assets in one commercial industry may depreciate quicker than they would in a residential property, assets such as carpets, which will depreciate at a higher rate in hospitality than in office buildings or a residential dwelling.

Rules about claiming and occupancy of the property

BMT go on to say that “ATO legislation states that a residential property owner can’t claim depreciation for a building they themselves solely occupy. They can only claim depreciation on a building that is income producing. In a commercial property however, there are ways that the owner can occupy the investment property and still be able to claim depreciation. If purchased by a company or a trust, the owner can occupy the property as a tenant and claim property depreciation.

Investors and tenants can both claim

BMT also tell us that in relation to 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. If the owner of the asset decides to on-sell items installed or keep them for future use, this does not apply.

Always talk to the experts

When it comes to depreciation, don’t guess. Leave the research and the calculations up to the experts. A team like BMT Tax Depreciation will be able to provide a quantity surveyor and provide further advise on which depreciation may apply annually to your residential and your commercial investments.