Changing commercial property into residential living spaces has become an increasingly popular trend in recent years, and it’s easy to see why – with the rise of remote work, more commercial spaces are sitting empty. Residential conversion of existing commercial buildings can provide opportunities for developers, investors and tenants.
In this article we look at:
- How investors change commercial property into residential living spaces
- Depreciation eligibility
How investors change commercial property into residential living spaces
Changing a commercial building to a residential property can be a complex process involving several steps, such as obtaining necessary permits and complying with building regulations and zoning laws.
While growing in popularity, it’s not an easy undertaking to convert property usage. Typically, the most difficult factors are zoning and residential tenancy laws.
Zoning laws in Australia are a set of regulations which govern land use and development. Each state and territory in Australia has its own set of zoning regulations, which are administered by local councils or planning authorities.
Most zones fall into a residential, agricultural, commercial, or industrial category. Zoning can be exclusive or mixed-use. It’s important to note that the specific rules and regulations for each zone can vary by jurisdiction and can be subject to change over time. Building owners and developers should contact their local council or building authority to find out information specific to their scenario.
In Australia, each state and territory also has its own residential tenancy laws which specify the minimum standards that rental properties must meet. These standards are in place to ensure that rental properties are safe, habitable, and meet the basic needs of tenants.
For instance, according to New South Wales Government Fair Trading, a property must have the following to meet minimum standards:
– Be structurally sound
– Have adequate natural or artificial lighting in each room, except storage rooms or garages
– Have adequate ventilation
– Be supplied with electricity or gas, and have enough electricity or gas sockets for lighting, heating and other appliances
– Have adequate plumbing and drainage
– Have a water connection that can supply hot and cold water for drinking, washing and cleaning
– Have bathroom facilities, including toilet and washing facilities, that allow users’ privacy
It’s important for landlords and property managers to be aware of the minimum standards in their state or territory and to ensure that their rental properties meet these standards.
One of the primary benefits of changing the use of a property is that it can be done quickly and cost-effectively. Instead of starting from scratch, developers can work with existing structures, often resulting in a shorter construction timeline and lower costs.
When changing commercial property, many assets will become obsolete. Items such as desks, counters, shelving, CCTV systems, flooring and more are typically removed to prepare the building for residential use. In most cases, commercial buildings will be completely stripped back to reveal the original shell, this is commonly known as bringing a property ‘back to base’.
When removing assets with remaining value, investors can ‘scrap’ these assets and claim the unclaimed depreciation and capital works as a tax deduction.
Scrapping value is essentially the un-claimed or un-deducted depreciable value of an asset at the time of removal. The scrapping value is calculated as follows:
Scrapping value = original depreciable value – deducted value to date
For instance, if the original value of desks were $7,000, and $3,000 in depreciation was claimed by the time of the asset’s disposal, the ‘scrapping’ value would be $4,000. The owner could claim the $4,000 as an instant tax deduction in the same financial year as removal.
It’s important to talk to a specialised quality surveyor before removing any assets so they can record the assets available for depreciation deductions.
Residential property is subject to different depreciation rules than commercial property. Owners are eligible to claim depreciation deductions on capital works and qualifying assets. Tenants are generally not eligible to claim depreciation deductions on rental property unless they are using the property to produce income, such as running a home-based business.
Since the 2017 legislative changes, owners of second-hand properties could no longer claim deductions on existing assets. This doesn’t affect brand-new properties, brand-new assets commercial property or capital works deductions.
Therefore, changing commercial property into residential spaces often involves significant renovations, upgrades, and installing new fit-outs, which generates qualification for depreciation on newly installed assets and upgrades.
Changing commercial property into residential spaces is likely to continue as cities seek to address the ongoing housing shortage. With the right planning and execution, it’s possible to create high-quality, affordable housing options which benefit tenants, the local community and the investor.
It’s essential to engage a specialised quantity surveyor to complete site inspections before and after properties are converted and renovations completed. Failing to do so can mean missing out on significant deductions, resulting in a potential loss of thousands of dollars.
BMT Tax Depreciation conduct physical site inspections to ensure all deductions are identified and claims are maximised while maintaining full Australian Taxation Office compliance
To learn more about the deductions available in residential units call BMT on 1300 728 726 or Request a Quote.