Why residential investors are taking a closer look at small commercial property

Smaller commercial assets may offer different tax positions, a competitive entry point and meaningful depreciation potential as residential settings shift.

With residential property tax settings changing, some investors are widening the search for their next purchase. Negative gearing changes are focused on certain residential properties rather than commercial assets, prompting some investors to reassess opportunities outside the traditional residential market.

Commercial property does not have to mean large office towers, logistical facilities or industrial complexes. Strata offices, consulting rooms, allied health suites, small warehouses, retail premises, industrial units and storage units can provide access to the sector at a price point comparable to many established residential investments.

A different lease equation

Many smaller commercial properties are located in familiar settings such as suburban centres, medical precincts, business parks and mixed-use developments. The key difference is the tenant. Instead of a household, a business occupies the space, making the lease a critical factor in assessing income security.

Lease length, renewal options, rent reviews, incentives, make-good obligations, permitted use and guarantees can all influence an asset's income profile. While a long lease may appear attractive, the underlying terms often determine the strength of the investment.

Vacancy can also present different challenges. Residential properties generally appeal to a broad tenant market, whereas commercial premises may require a tenant with specific operational needs, approvals or customer access. A specialised fit-out that suits one business may not suit the next occupant.

Fit-out, ownership and depreciation

Fit-outs are often one of the most significant differences between residential and commercial property. Partitions, flooring, lighting, air-conditioning, cabinetry, plumbing, security systems and signage can all contribute to depreciation deductions. Commercial property is also unaffected by the 2017 changes that restrict depreciation claims on previously used plant and equipment in residential properties.

However, ownership is not always straightforward. Some assets may belong to the property owner, while others may have been installed and paid for by the tenant. This distinction can affect the depreciation eligibility and should form part of the due diligence process before purchase.

The following table highlights examples of second-hand commercial properties purchased for less than $1 million where BMT completed tax depreciation schedules during FY 2025-26. These typical examples are based on individual depreciation schedules and demonstrate how deductions can vary across asset types.

Table 1: Depreciation deductions on small commercial assets

*Calculated using the diminishing value method

The variation reflects factors beyond purchase price. Building structure, renovation history, construction type, condition, plant and equipment assets, tenancy history and fit-out ownership can all influence the final claim. As a result, two properties with similar values may generate very different depreciation outcomes.

The practical impact of depreciation can be seen by comparing the same property with and without a depreciation claim. The cash flow analysis below demonstrates this, with depreciation improving the annual cash flow position by more than $8,700.

Table 2: Warehouse purchased for $1,000,000

Looking beyond residential

For investors considering alternatives to residential property, commercial assets introduce a different set of considerations. Lease quality, tenant profile, vacancy risk, permitted use and fit-out ownership can all affect cash flow and long-term performance.

As investors compare opportunities across property sectors, understanding the depreciation position before purchase can help provide a clearer picture of potential holding costs and returns.

For first-time commercial investors looking beyond residential property, contact BMT Tax Depreciation on 1300 728 726 or Request a Quote to understand the depreciation picture before purchase and assess potential deductions alongside cash flow.