As an entrepreneur who buys or rents a commercial property, you will encounter an important tax topic: depreciation. A property is a valuable asset, but it also comes with rules, obligations, and tax opportunities.
How does depreciation actually work? How does it work with VAT and floor value? And what if you rent a property instead of buying it? In this article, we explain how to properly depreciate a commercial property as an entrepreneur, without surprises later on.
What is depreciation?
Depreciation means that you spread the cost of a business asset, such as a commercial property, over several years as business expenses in your records. That’s because a property lasts longer than one year and during that time slowly decreases in value due to wear and aging.
By depreciating part of the value each year, you reduce your taxable profit. This can result in considerable tax savings and keep your profit figures more realistic.
When are you allowed to depreciate a commercial property?
You may only depreciate a commercial property if the property is used for business purposes, is owned by you or your business, and is listed on your company’s balance sheet.
Do you also use part of the property privately, for example, as living space? Then you may only depreciate the business portion. You must be able to reasonably substantiate this business portion, for example, based on the number of square meters or a clear floor plan.
Good substantiation and a clear separation between business and private use are essential to avoid problems during an audit.
Buy or rent: what’s the difference?
The way you use a commercial property and the legal form you choose also determine how you may depreciate it.
-
If you buy a property, the building is on the balance sheet, and you may depreciate the building (excluding the land) annually.
-
If you rent a property, you may not depreciate the property itself, because it is not your property. However, you may depreciate costs you incur yourself for renovation, furnishing, or modifications to the rented property.
This only applies if these investments have a business purpose and you paid for them yourself.
How does depreciation work?
You may depreciate a commercial property each year by a fixed percentage until you reach the minimum tax value – the floor value.
You calculate the depreciable amount as follows:
Purchase price – (land value + residual value) = depreciable amount
The value of the land may never be depreciated, because in principle it does not decrease in value.
Important rules here are:
-
You may depreciate a maximum of 3 percent of the depreciable amount per year.
-
You may not depreciate below the floor value:
-
For own use, that is 50 percent of the WOZ value.
-
For rental to third parties, that is 100 percent of the WOZ value.
-
-
The WOZ value is determined annually by your municipality and reflects the market value of the property.
Depreciation starts when the property is put into business use, not earlier.
VAT aspects for a commercial property
In addition to income tax, VAT rules also play a role in commercial property. This is often a complex part, with the following principles:
-
When purchasing a commercial property, you usually cannot reclaim VAT, unless it concerns a new building or a property that was recently renovated and is sold with VAT.
-
For maintenance and renovation costs that you pay yourself and that are exclusively for business use, you may reclaim the VAT.
The Tax Authorities may require you to adjust the VAT over several years if the use of the property changes. For example, if you later use part of the property privately or start renting it out.
If you are unsure about these complex VAT rules, it is wise to consult an accountant or tax advisor.
Common mistakes in depreciating commercial property
There are a number of common pitfalls you can avoid:
-
Including the land value in the depreciation.
-
Depreciating below the floor value.
-
Depreciating the entire property while you partly use it privately.
-
Not taking into account annual changes in the WOZ value.
-
Depreciating a rented property without having made your own investments.
These mistakes can lead to corrections, additional tax assessments, or even fines during an audit.
Renting and depreciation: renovations and investments
If you rent a property as an entrepreneur, you may not depreciate the property itself. However, you may depreciate business investments you have made in the property, such as:
-
A renovation you paid for yourself.
-
Furnishings or installation of facilities.
-
Adjustments to electricity, lighting, or floors.
The rent of the property itself can be reported as expenses.
You record these improvements separately on your balance sheet and depreciate them over the economic life of the investment.
Tips for good administration
A flawless administration helps a lot. Keep purchase deeds, invoices, and WOZ assessments, clearly document the split between business and private, track annual changes in the WOZ value, and note when the property was put into business use. This way, you are well prepared if the Tax Authorities ask for supporting documents.
Tax benefits and limitations
Depreciation is an important way to reduce your taxable profit and pay less income tax. However, strict rules apply to prevent abuse. It is important to remember that you may only depreciate the business part of the property, that you may not go below the floor value, and that the land is never depreciated.
In addition, you can sometimes benefit from other schemes, such as investment allowance or business savings for future investments.
Conclusion: Smart depreciation provides certainty and benefits
Depreciating a commercial property as an entrepreneur offers tax benefits and ensures a realistic representation of your profit. But the rules are strict and complex, especially in the case of mixed-use, VAT revision, and rented properties.
By keeping good records and following the right steps, you prevent mistakes and make optimal use of the possibilities.
Are you unsure about the right approach, or do you want to be sure you don’t miss out on benefits? The experts at Balancify will be happy to help you with personal advice and clear bookkeeping, so you can continue building your business with peace of mind.
Contact Balancify today for a no-obligation introduction and discover how we can help you with all your administrative and tax questions.
