Crunch the numbers for your commercial property and save
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 along with rental vacancy rates in the immediate area. They may also like to factor the current tenancy contract in place with historical growth.
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 property 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 $16,692 just by claiming property depreciation.
The property investor was considering purchasing a commercial office building for $930,000. 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 $950 per week, or $49,400 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 $60,450 per annum.
They contacted BMT Tax Depreciation 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 $45,080 in depreciation in the first full year.
The following table provides a summary of these costs and the investors’ annual position, depending on whether or not depreciation is claimed.
Without claiming depreciation, the property investor would experience a loss of $134 per week during the first year of owning the property. By claiming depreciation, the property owner will now receive a return of $187 per week, or $9,724 in the first year of ownership.
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.
Article by BMT Tax Depreciation.
Bradley Beer (B. Con. Mgt, AAIQS, MRICS) is the Managing Director of BMT Tax Depreciation. Please contact 1300 728 726 or visit www.bmtqs.com.au for an Australia wide service.