🔑 Key Takeaways
Property depreciation is the natural decline in value of a building and its contents over time due to wear and tear, ageing, and obsolescence. The Australian Tax Office allows investment property owners to claim this decline as a tax deduction, reducing your taxable income and increasing your after-tax return on the investment.
What makes depreciation particularly powerful is that it is a non-cash deduction. Unlike interest payments, insurance premiums, or property management fees, depreciation does not require you to physically spend money in the year you claim it. The building is losing value due to age and use, and the ATO allows you to deduct that theoretical loss from your income. For many property investors, depreciation turns a cash-flow-negative property into a cash-flow-positive one after tax refunds are factored in.
Despite being one of the most valuable tax benefits available to property investors, depreciation is also one of the most commonly overlooked. Research from quantity surveying firms suggests that roughly 80% of investment property owners are either not claiming depreciation at all or significantly under-claiming. On a typical investment property, this can mean missing out on $5,000 to $20,000 or more in deductions over the first five years of ownership.
Division 43 covers the structural elements of the building: the walls, roof, floors, doors, windows, built-in cupboards, and any structural improvements. These items are deducted at a rate of 2.5% per year over 40 years for residential properties (meaning the total construction cost is written off over four decades).
To claim Division 43 deductions, the property must have been built after certain dates. For residential rental properties, the key date is 15 September 1987. Properties built after this date are eligible for the 2.5% annual deduction. Properties built between 18 July 1985 and 15 September 1987 may qualify at a rate of 4% per year. Properties built before July 1985 generally do not qualify for Division 43 deductions.
The deduction is based on the original construction cost, not the purchase price. For a property with a construction cost of $300,000, the annual Division 43 deduction is $7,500 (2.5% of $300,000). At a marginal tax rate of 37%, this single deduction saves the investor $2,775 per year in tax, every year for 40 years.
Division 40 covers the removable or mechanical items within a property: things that are not part of the building structure itself but are used in the operation of the property. Common plant and equipment items in a rental property include carpet, blinds and curtains, hot water systems, air conditioning units, dishwashers, ovens and cooktops, light fittings, smoke alarms, and garage door motors.
Each plant and equipment item has its own effective life set by the ATO, and the deduction is calculated using either the diminishing value method (which gives larger deductions in the early years) or the prime cost method (which spreads the deduction evenly over the item’s life). For example, carpet has an effective life of 10 years. A $5,000 carpet claim using the diminishing value method would yield a deduction of $1,000 in the first year, compared to $500 per year under the prime cost method.
📊 Common Plant & Equipment Items and Their Effective Lives
| Item | Effective Life | Typical Value |
|---|---|---|
| Carpet | 10 years | $3,000 to $8,000 |
| Blinds & Curtains | 10 years | $1,500 to $4,000 |
| Hot Water System | 12 years | $1,500 to $3,500 |
| Air Conditioning (split) | 10 years | $2,000 to $6,000 |
| Dishwasher | 10 years | $800 to $2,000 |
| Oven/Cooktop | 12 years | $1,000 to $3,000 |
| Garage Door Motor | 10 years | $800 to $1,500 |
| Smoke Alarms | 6 years | $50 to $200 |
In November 2017, the Australian Government introduced significant changes to depreciation rules for investment properties. Under the new rules, owners of second-hand residential properties can no longer claim Division 40 (plant and equipment) deductions for items that were already in the property at the time of purchase. This was a major change that affected buyers of established properties.
However, there are important exceptions and nuances. You can still claim Division 40 deductions for any new plant and equipment items you install after settlement. If you buy a second-hand property and replace the carpet, install a new air conditioning system, or fit a new dishwasher, those items are fully depreciable. Additionally, Division 43 (capital works) deductions were not affected by the 2017 changes: you can still claim 2.5% of the construction cost regardless of whether the property is new or second-hand.
For brand new properties or those purchased off the plan, both Division 40 and Division 43 deductions remain fully available. This is one reason new properties often provide better depreciation benefits in the early years of ownership, and why depreciation is a factor your finance broker should consider when helping you evaluate the true cost of owning different types of investment property.
A depreciation schedule is a detailed report prepared by a qualified quantity surveyor that outlines all the deductions you can claim on your investment property over its remaining useful life. The report breaks down both Division 43 and Division 40 items, calculates the deductions under both the diminishing value and prime cost methods, and provides a year-by-year summary your accountant uses when preparing your tax return.
A professional depreciation schedule typically costs between $600 and $800, and the fee itself is tax-deductible. For most investment properties, the schedule pays for itself many times over in the first year alone. On a five-year-old property worth $500,000, a depreciation schedule might uncover $8,000 to $12,000 in deductions in the first year, resulting in a tax saving of $3,000 to $4,500 for someone on a 37% marginal tax rate.
📋 Client Example: New Apartment in Geelong
A client purchased a brand new two-bedroom apartment in central Geelong for $485,000. The depreciation schedule revealed total deductions of $14,200 in Year 1 ($7,500 Division 43 plus $6,700 Division 40). On a combined household income in the 37% tax bracket, this delivered a tax refund of approximately $5,250, more than enough to cover the negative gearing shortfall on the property. Over the first five years, cumulative depreciation deductions totalled $52,000, saving the client nearly $19,000 in tax.
The best time to order a depreciation schedule is as soon as possible after purchasing your investment property. The quantity surveyor should ideally inspect the property before any tenant moves in, as this gives them the most accurate picture of the property’s condition and the items available for depreciation.
If you have owned an investment property for years without a depreciation schedule, it is not too late. Your accountant can amend previous tax returns (generally going back two years, or four years in some circumstances) to claim depreciation you missed. The cost of the depreciation schedule plus the accountant’s amendment fees is usually a fraction of the refund you receive for the missed claims.
Only a qualified quantity surveyor who is registered as a tax agent can prepare a depreciation schedule that the ATO will accept. Accountants and property managers cannot prepare these schedules themselves. They need the specialist knowledge and ATO registration of a quantity surveyor. Your finance broker or accountant can recommend a reputable firm.
There is an important link between depreciation claims and capital gains tax that every investor should understand. When you sell your investment property, any Division 40 depreciation you have claimed is effectively “clawed back” through an adjustment to the asset’s cost base. This is known as a balancing adjustment.
For example, if you claimed $15,000 in Division 40 depreciation on plant and equipment over five years, and those items have increased in value or are sold with the property, you may need to include a balancing adjustment in your income. However, Division 43 (capital works) deductions do not trigger a balancing adjustment in the same way. They reduce the cost base of the building for CGT purposes but are not recaptured as income.
Despite this clawback mechanism, claiming depreciation is almost always beneficial. The tax savings you receive each year through depreciation are available immediately and can be reinvested or used to reduce your mortgage. The CGT impact only occurs when you eventually sell, potentially decades later, and the 50% CGT discount (for properties held over 12 months) further reduces the impact of any cost base reduction.
💡 Pro Tip
If you renovate your investment property, order an updated depreciation schedule after the renovation is complete. The new items you install (kitchen, bathroom fittings, flooring, fixtures) all have their own depreciation schedules and can significantly increase your annual deductions. The cost of updating your schedule is tax-deductible too.
New apartments and units offer the highest depreciation in the early years, as both Division 43 and Division 40 are at their maximum values. A typical new apartment worth $500,000 to $600,000 can generate $12,000 to $18,000 in Year 1 deductions.
New houses can generate even higher total deductions due to the larger construction cost. However, the land component (which is not depreciable) typically represents a larger proportion of the purchase price for houses than apartments.
Older established properties built after 1987 still qualify for Division 43 deductions. A property built in 1995 with a construction cost of $200,000 would still yield $5,000 per year in Division 43 deductions ($200,000 × 2.5%), with 29 years remaining on the 40-year schedule. Plant and equipment items installed by the current owner after purchase are also depreciable.
Commercial properties have different depreciation rates for Division 43: industrial buildings may qualify for a 4% rate rather than 2.5%, and commercial fit-outs typically have shorter effective lives, generating larger deductions in the early years.
Renovating an investment property creates significant depreciation opportunities that many investors fail to capture fully. When you demolish or remove existing items (like ripping out old carpet or removing a dated kitchen), the remaining depreciation value of those items can be claimed as a scrapping deduction in the year they are removed. This can create a substantial one-off deduction.
At the same time, all new items installed during the renovation begin their own depreciation schedules. A $30,000 kitchen renovation might include $8,000 in depreciable plant and equipment items (the oven, cooktop, rangehood, dishwasher, and tapware), each with their own effective life and depreciation rate. The remaining $22,000 in structural work (cabinetry, benchtops, splashback) falls under Division 43 at 2.5% per year.
Always order an updated depreciation schedule after completing renovations. The quantity surveyor will assess the new items, calculate scrapping deductions for anything removed, and provide updated year-by-year deduction figures. The increase in depreciation after a renovation often surprises investors. It is not uncommon to see annual deductions jump by $3,000 to $8,000 following a significant renovation.
Smart investors factor depreciation into their cash flow calculations from the very beginning. When evaluating whether an investment property is affordable, most buyers focus on the gap between rental income and expenses (mortgage repayments, rates, insurance, management fees). But depreciation, because it is a non-cash deduction, effectively provides additional income through your tax refund that does not show up in the basic cash flow calculation.
You can even apply to the ATO for a PAYG withholding variation, which reduces the tax withheld from your salary throughout the year based on your expected rental losses (including depreciation). Instead of waiting until you lodge your tax return for a lump-sum refund, you receive the benefit in each pay cycle. This can improve your monthly cash flow by hundreds of dollars and is particularly useful for investors who are stretching to afford the property in the early years.
Your finance broker can model the impact of depreciation on your overall borrowing capacity and cash flow position. When we assess how much you can comfortably borrow for an investment property, we factor in the expected depreciation benefits alongside rental income, negative gearing tax offsets, and your existing income and expenses. This holistic approach often reveals that investors can afford more than they initially think.
📋 Client Example: PAYG Variation Success
A teacher in Torquay on the Surf Coast purchased a new townhouse as an investment for $520,000. After factoring in depreciation of $13,500 in Year 1, her total rental loss (including interest, rates, and depreciation) was $18,000. We helped her apply for a PAYG withholding variation, which increased her fortnightly take-home pay by $256. This turned what appeared to be an unaffordable $180 per week out-of-pocket cost into a manageable $56 per week after the tax benefit was applied to her regular pay.
No. Depreciation deductions are only available for properties that produce assessable income, such as rental properties. Your primary residence does not generate rental income (unless you rent out a portion of it), so depreciation cannot be claimed. However, if you later convert your home to an investment property by renting it out, you can order a depreciation schedule at that point and begin claiming deductions from the date it becomes income-producing.
Yes. The cost of obtaining a depreciation schedule from a qualified quantity surveyor is fully tax-deductible in the year it is incurred. This includes both the initial inspection fee and the cost of any subsequent updates if you renovate the property.
Properties built before 18 July 1985 generally do not qualify for Division 43 capital works deductions. However, any renovations or improvements made to the property after that date can be depreciated. Additionally, new plant and equipment items you install are depreciable regardless of the building’s age. It is still worth getting a depreciation schedule, especially if any renovation work has been done since 1985.
The diminishing value method gives larger deductions in the early years and smaller deductions later, while the prime cost method spreads deductions evenly. Most investors prefer the diminishing value method because it maximises early cash flow benefits. However, if you plan to hold the property long-term and want consistent deductions each year, the prime cost method may suit better. Your quantity surveyor will provide calculations for both methods so you can choose.
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Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
