Depreciation is one of the most underused tax benefits available to Australian property investors. Unlike most tax deductions, depreciation doesn’t require you to spend any money — it’s a paper deduction based on the wear and tear of your property and its fixtures. Done correctly, it can add thousands of dollars per year to your tax savings. Here’s how it works.
What Is Property Depreciation?
The ATO recognises that buildings and the assets inside them decline in value over time. As an investment property owner, you can claim a tax deduction for this decline — even though you haven’t actually spent any money on it during that financial year.
There are two types of depreciation deductions:
Division 43 — Capital Works (Building Write-Off): This covers the structural components of the building itself — walls, floors, roof, windows, and fixed structural features. For residential properties built after 16 September 1987, you can claim 2.5% of the construction cost each year for up to 40 years.
Division 40 — Plant and Equipment: This covers the removable or mechanical assets within the property — carpets, appliances, blinds, air conditioning units, hot water systems, smoke alarms, and so on. Each item depreciates at its own rate, typically over 5–15 years.
How Much Can You Claim?
The amount varies significantly depending on the age, type, and value of the property. As a rough guide:
A brand-new house or apartment worth $700,000 might generate $15,000–$25,000 in depreciation deductions in year one. A 10-year-old property that has been renovated might generate $5,000–$12,000. An older property with no capital works after 1987 will have limited Division 43 claims but may still have Division 40 items claimable.
Do You Need a Depreciation Schedule?
Yes. To claim depreciation, you need a tax depreciation schedule prepared by a qualified quantity surveyor. This is a report that identifies every claimable item in and around your property, assigns a value to each, and calculates the depreciation deduction for each financial year.
A depreciation schedule typically costs $500–$800 and is itself tax-deductible. The return on that investment — in additional tax savings — is almost always substantial.
New vs Second-Hand Properties
New properties generate the highest depreciation deductions because both Division 43 and Division 40 are fully available. For second-hand residential properties purchased after 9 May 2017, Division 40 (plant and equipment) deductions are only available on assets purchased new by the current owner — so you can’t claim depreciation on the previous owner’s carpet or appliances. Division 43 (structural) claims are still available for eligible second-hand properties.
This rule change made new properties relatively more attractive from a depreciation standpoint — another reason many investors favour brand-new or off-the-plan properties.
Depreciation and Negative Gearing
Depreciation deductions increase your paper loss, which can turn a positively geared property into a negatively geared one — increasing your tax benefit. Conversely, even a property that would otherwise be positively geared may show a paper loss once depreciation is factored in, allowing you to reduce your tax bill while still receiving net positive cash flow.
Depreciation and Loan Structure
Your depreciation deductions interact with your loan structure in important ways. Maximum loan interest (achieved through interest-only loans on investment properties) combined with maximum depreciation gives you the largest possible tax deduction. Getting your finance structure right from day one amplifies the benefit of your depreciation schedule.
Assembly Finance: Your Investment Property Finance Partner
We work hand-in-hand with accountants and quantity surveyors to ensure our investor clients have both their finance and their tax strategy optimised. Reach out to James today to discuss your investment property finance strategy.
