Compared to the complexity of other financial investments, many people view property as a relatively straightforward means to add to a portfolio. Although you should avoid exclusively investing in one asset type, you may consider spreading your property investing between commercial and residential sectors. Beyond being able to live in one, there are other major differences between these two types of properties. Read below for some more information.
Many people forget to factor in this cost, but when you invest in commercial property you need to register for GST. There are certain scenarios (such as the margin scheme) where you can claim GST back after a commercial purchase, as well as opportunities for GST credits. Fully tenanted buildings for example are generally GST-free for the vendor. But if you sell property without GST but should have, you’ll still need to pay it out of your pocket, so watch out!
When you sell your commercial property in Australia capital gains tax will need to be paid if it was sold for a profit. This is calculated through your regular income tax on the financial year it’s sold. Alas if you make a loss, however, you cannot claim it against your other income but can reduce other capital gains. Concessions for small businesses, for example, do exist.
If your residential property is your main home, it is generally exempt from capital gains tax. If you run a business from it or have rented it out, this will not be the case.
If you lease out your commercial premises you can claim deductions on the rent’s income tax due to expenses such as management of the property and interest on the loan. If your tenants pay utilities, you cannot claim these as a deduction. You will pay GST on the rent you receive if you need to be GST registered, but you can claim GST credits for related purchases you’ve bought to allow you to rent the property. For residential rentals you can’t apply for these GST credits because GST isn’t applicable for these properties. If you only rent part of a residential premises, you can only claim any applicable deductions related to that part along with a moderate percentage for communal areas like outdoor spaces.
In Australia, commercial property leases are normally longer in duration than residential. This provides more stability of income for a commercial landlord as rental income is guaranteed for a longer period. Commercial leases may be advertised as having an option clause where subject to certain conditions, a lease may be renewed to extend the original term. Rental agreements tend to be for a fixed term and coming up to the expiry, a landlord can personally decide whether to offer a renewal to the tenant and for how long.
In a residential scenario, rates and repairs will be paid by the landlord, while a in a commercial let, the tenant covers these themselves. This typically works out well for a commercial landlord!