Investing in commercial property can be an excellent way to diversify your investment portfolio, generate passive income, and build long-term wealth. There are many benefits to investing in commercial property including:
- High Rental Yields: Commercial property typically generates higher rental yields than residential property, providing investors with a reliable source of passive income.
- Long-Term Investment: Commercial property can be a long-term investment, providing investors with steady capital growth over time.
- Diversification: Investing in commercial property can help diversify your investment portfolio, reducing your exposure to risk.
- Tax Benefits: Investors in commercial property are eligible for various tax benefits, including depreciation deductions, which can help offset rental income and reduce tax payable.
- Outgoings covered by tenants: Building insurance, property management fees, council rates, water rates, body corporate fees, repairs, cleaning, gardening.
Below is a general guide about what is deemed a commercial investment property, commercial property types, commercial property depreciation explained, and real commercial property case studies.
What is a commercial investment property?
A commercial investment property is a property that is used for business rather than for personal use. The owner of the building can either operate their own business from the premise or lease to another business owner. There are many types of commercial investment property types such as:
- Office space;
- Pub;
- Gym;
- Childcare facility;
- Medical and dental
- Car yard;
- Cafe/restaurant;
- Retail or wholesale shop;
- Hair and beauty salon;
- Service station;
- Fast food outlet;
- Tattoo salon;
- Storage.
What is commercial property depreciation?
Commercial property depreciation is a tax deduction that claims for the wear and tear on the building as well as fixtures and fittings within the building. The depreciation deduction can total thousands and in some cases hundreds of thousands of dollars.
There are three different types of depreciation for qualifying commercial properties:
Division 40 – is the legislation that covers the depreciation of ‘plant and equipment’ within an investment property. Each plant and equipment item has an effective life set by the Australian Taxation Office (ATO) and the depreciation deduction available on that item is calculated using this effective life.
Division 43 – Otherwise known as ‘Capital Works Allowance’ or ‘Building Write-Off’, Division 43 covers the deduction available to owners for the structural elements of a building and the items within the property that are deemed irremovable.
Scrapping – Asset scrapping refers to plant and equipment assets, Division 40, that have been removed/replaced, or the writing-off of building works, Division 43, that have been demolished in an income-producing property.
When as asset or capital works have been demolished or disposed of, any residual value left in their effective life can be claimed as a tax deduction in the financial year of the demolition or disposal. See further below our hotel case study and what our clients claimed in scrapping.
How does depreciation increase the yield on your commercial property?
Scott O’Neill from Rethink Investing shares:
‘While depreciation is a paper expense that provides taxation benefits, this increases after- tax net yield.
For example:
A new purchase $1,000,000
Say the net yield is 6% is $60,000
Say the depreciation for the year is $15,000
Let us utilise the company rate of 30% (for the investment entity and 25% for the trading entity)
Hence, the tax benefit is $4,500 (30% of $15,000)
This tax benefit is 0.45% ($4,500 / $1,000,000)
Therefore, the net yield after-tax benefits is 6.45% (i.e. 6% actual and subject to tax, as well as 0.45% from taxation benefits from depreciation).
We note that the 6.00% net yield is a pre-tax return and will be subject to tax. However, the depreciation is an additional tax benefit of 0.45% which is a true value.’
Case Study – Industrial Warehouse
Our client Fitz purchased an industrial warehouse in 2021 for $1.5 million. The warehouse has a floor area of 982m2, offices, bathroom amenities, 4 high bay roller door access, kitchenette and 9 car parking spaces.
Below is what Fitz’s was entitled to claim in depreciation deductions:
Case Study – Hotel
Our client Ethan and Owen purchased the leasehold for a large pub. They completed a renovation and scrapped the old fit-out that the previous owners had completed in recent years. The bottle shop did not need to be renovated.
Deductions for scrapping in the 2021 financial year: $460,000.
Total deductions from the commercial depreciation schedule for the 2021 financial year: $836,026.
Summary breakdown of treatment of assets (figures are rounded):–
Who can claim the commercial property depreciation?
Both landlords and lessees have the opportunity to increase cashflow and return on investment by claiming substantial tax deductions for the capital works and depreciation of their building, business assets and fit-out.
Commercial Property Investment Tips
- Do Your Research: Before investing in commercial property, conduct thorough research on the market, property type, location, and tenant profile. This will help you make informed investment decisions.
- Work with Professionals: Commercial property investment is a complex process, and it is best to work with professionals, including real estate agents, solicitors, and accountants, to ensure a smooth transaction.
- Have a Clear Investment Plan: It is essential to have a clear investment plan outlining your investment goals, risk tolerance, and exit strategy.
- Manage Your Risks: Investing in commercial property involves risks, including vacancy, maintenance costs, and market fluctuations. It is important to manage your risks and have plans in place.
Investing in commercial property can be a profitable and rewarding investment strategy, which can provide you with long-term passive income and capital growth.
With careful planning and professional guidance, investing in commercial property can be a great way to diversify your investment portfolio.
Whether you are an owner or lessee of a commercial property, if you would like depreciation advice on what you are entitled to claim, we would be happy to discuss with you.
Our commercial team combined has over 40+ years’ of experience in the industry. You can call us on 1300 922 220 or visit Commercial Property Depreciation to learn more.
