Commercial or Residential Property?
Five reasons you should consider purchasing commercial property rather than residential
When someone describes themselves as a property investor, especially if they're an individual or "mom and pop" investor, we might immediately think they're talking about residential property. However, more people are now realising the potential benefits of investing in commercial property.
1. You can claim depreciation on the asset
A depreciable asset is something that, in normal circumstances, might reasonably be expected to decline in value while it's being used or is available to use. In 2010, commercial property was removed from the list of depreciable assets, but this was reversed with law changes introduced during the pandemic. (You can read more about this in the IRD's document: Depreciation – a guide for businesses.) Moreover, the list of depreciable assets for chattels ("movable goods" such as appliances, desks, chairs, lighting, etc.) and building fit-out is far more extensive than those captured by residential property.
2. Your tenant pays many of the property's outgoings
Assuming the property is tenanted, and depending upon the terms of the lease, the tenant will likely pay for outgoings like rates, water, power, and any other service charges for the property. This is just one of the reasons that Turner Hopkins recommends that a tenancy is documented correctly using the current Auckland District Law Society lease, which includes a comprehensive list of outgoings payable by the tenant.
3. There's a formal procedure to deal with any tenant payment defaults
The Property Law Act 2007 includes a specific method to remedy any defaults on payments by the tenant. This could involve serving a notice stating the intention to cancel the lease for non-payment of rent. If the terms of this notice are not met, the commercial property landlord may, in some circumstances, cancel the lease and re-enter the premises.
4. Commercial property tax losses can be offset against other income
Unlike residential property, tax losses against commercial property are not ringfenced. This means that any tax losses can be offset against other income. Especially if you pay tax at one of the higher rates, it's important that you speak with your accountant to see how this offsetting can be of most benefit to you.
5. There's no bright-line test for commercial property
Summing up the bright-line tax rule, the IRD states: "If you sell a residential property you have owned for less than 10 years you may have to pay income tax on any gain on the sale, unless an exclusion or rollover relief applies." (Incidentally, this also applies to New Zealand tax residents who purchase residential property overseas.) The bright-line test rules can be complex, depending on whether the property is a new build, when you bought it, and current legislation.
The good news is that the bright-line tax rule does not apply to commercial property.
Before embarking on any kind of property purchase, make sure you understand exactly what the deal entails. The Turner Hopkins property law team can provide proven, trustworthy advice for commercial and residential investments, and you can rely on us to be staunchly in your corner. To speak to one of our property law specialists, call (09) 486 2169 or contact us.