Whilst much interest is generally paid to rates of return and capital growth of investments, the varying tax treatment of different types of investment classes is often overlooked. One of the benefits of commercial property as an investment class is the tax treatment of income and expenses. With the right knowledge and strategies, property owners can take advantage of available deductions, such as depreciation, to reduce their taxable income and increase their cash flow. Although calculating depreciation can be a complex process, the rewards can be substantial.
Below is an overview of commercial property tax depreciation and how to maximise your benefits. Additionally, we will cover important considerations for property owners and the different depreciation methods. Naturally, this information is general in nature and you should speak to your accountant for specific advice relating to your particular circumstances.
What is a Tax Depreciation Schedule?
Tax depreciation is a common and useful tool that allows property owners to deduct a portion of the costs associated with owning commercial property over a given period of time. It’s an important financial tool for property owners, as it can help reduce your taxable income, reduce the amount of taxes you owe, and potentially increase your cash flow.
A tax depreciation schedule is a document that outlines the amount of depreciation that can be claimed for a commercial property over its effective life. It’s important to note that the amount of depreciation allowed will vary depending on the type and age of the property.
Types of Depreciation
There are two main types of depreciation: straight-line depreciation and accelerated depreciation.
Straight-line depreciation is the simplest form of depreciation, and it’s based on the idea that the cost of an asset is spread out evenly over its useful life. This means that the same amount of depreciation is taken each year.
Accelerated depreciation, on the other hand, involves taking larger deductions in the earlier years of an asset’s life, and smaller deductions in the later years. This is a more complex form of depreciation, and it’s generally used for assets with shorter useful lives.
When it comes to commercial properties, there are several different types of deductions that can be taken into account, including depreciation for buildings, permanent fixtures, furniture, equipment, renovations and other improvements.
Tax Depreciation Schedules
Creating tax depreciation schedules is complicated process which involves looking at each depreciable item, assessing its useful life and then determining the appropriate depreciation method to apply. The task of creating these schedules is therefore best left to professionals and there are a number of firms who specialise in providing these to investors.
Other Considerations
There are several other factors that must also be considered in determining any role depreciation may have in your investment accounting. Things like the timing of deductions and the intended length of ownership may also play a role in whether depreciation deductions are appropriate. For example, whilst they may reduce your taxable income in the short and medium term, they may increase your capital gains tax in the longer term.
Remember, there is no substitute for qualified advice from a tax professional who specialises in commercial property taxation, or a depreciation expert to prepare a complete and accurate depreciation schedule. They can help you determine the amount of depreciation that can be claimed for your property, as well as the proper paperwork that needs to be filed.
Tax depreciation schedules can be a valuable tool for property owners looking to improve the value of their commercial assets. With a clear understanding of your property’s depreciation schedule, you can take advantage of the potential savings. By working with a qualified tax professional or depreciation expert, you can ensure that you are maximising your tax benefits.
