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Tax Allowance for Real Estate Investments Held at Fair Var

 Accounting for Depreciation on Investment Properties

IAS 40 Measurement Models

Investment properties are initially measured at cost, which includes purchase price and directly attributable costs (legal fees, transfer taxes).

Under IAS 40, entities choose one consistent subsequent measurement model for all investment properties:

  • Fair value model
  • Cost model

Cost Model

Under the cost model, an investment property is carried at cost less accumulated depreciation and any accumulated impairment losses.

Depreciation is recognized in profit or loss on a systematic basis over the property’s useful life. Key steps include:

  • Estimate the asset’s useful life and residual value
  • Allocate the depreciable amount (cost less residual value) over that useful life
  • Review at each reporting date for indicators of impairment and adjust if necessary (IAS 36)

Fair Value Model

When using the fair value model, entities do not depreciate the property. Instead, they:

  • Remeasure the property to its fair value at each reporting date
  • Recognize all fair value gains or losses in profit or loss as they occur

This approach provides current-market valuations but can introduce earnings volatility.


Tax Depreciation in the UAE Corporate Tax Regime

Under Federal Decree-Law No. 47 of 2022, taxpayers holding investment properties at fair value can make an irrevocable election to claim a “tax depreciation” deduction each year under Realisation Approach. The allowable deduction is the lower of:

  • 4 % of the property’s original cost for the 12-month tax period (or prorated for partial periods)
  • The tax written-down value at the start of the period

This election (i.e., Realisation) must be made in the first Tax Period in which the taxpayer holds an investment property and applies to all such properties going forward.

Taxpayers using the cost model automatically benefit from accounting depreciation deductions for tax purposes, aligning cost-model and fair-value-model taxpayers on equal footage.

Practical Considerations

  • Entities using the fair value model should still maintain records of original cost and accumulated tax depreciation to support the UAE election.
  • Depreciation schedules under the cost model require periodic review of useful lives and residual values.
  • Any switch from fair value to cost model (or vice versa) will have tax and accounting implications that must be disclosed.
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Location: United Arab Emirates

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