Before you Buy, Discover the Depreciation Benefits

Wednesday, August 6th, 2014
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Before purchasing a commercial investment property, make sure to crunch the numbers correctly. That next bargain may actually be more affordable if property depreciation is claimed.

Astute investors will usually consider the potential return of the property, surrounding commercial infrastructure, rental vacancy rates in the immediate area, historical growth and the current tenancy contract in place.

They should also work out the tax deductible costs and other deductions involved in owning the property, such as property management fees when required, rates, interest, repairs, maintenance, fit-out costs and depreciation.

These deductions add to the investor’s net cash return and every deductible dollar comes back to the owner at the marginal tax rate.

More often than not, investors fail to consider the financial benefit of claiming depreciation prior to making their purchase.

The following example shows how one commercial property investor identified an additional yearly cash flow of $14,829 just by claiming property depreciation.

The investor was considering purchasing a commercial office building for $820,000. They did some preliminary research and asked a Property Manager for a rental appraisal of the property, which resulted in an expected rental income of $1,050 per week, or $54,600 per year.

The investor was also able to work out an estimate of the costs involved in owning the property. Expenses including interest rates, property management fees, rates, repairs and maintenance costs came to a total of $57,088 per annum.

They contacted a specialist Quantity Surveyor for a free assessment of the likely deductions they could expect from the property and found out that they would be able to claim approximately $40,080 in depreciation in the first full year.

Without claiming depreciation, the investor would experience a loss of $30 per week during the first year of owning the property. By claiming depreciation, the property owner will now instead receive a positive return of $285 per week, or $13,262 in the same year.

An investor who crunches their numbers prior to making a purchase will gain a better perspective on the affordability of the property and their future cash flow position. Once they purchase the property, a specialist Quantity Surveyor can be engaged to prepare a property depreciation schedule to ensure depreciation deductions are accurate and maximised.

A specialist Quantity Surveyor will quote the fee for a commercial depreciation schedule on a case by case basis dependent on the type of property, its location and the assets the property will contain. The fee for arranging a tax depreciation schedule is also 100 per cent tax deductible for the owner of the property.

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