Depreciation is one of the most valuable tax benefits available to Australian property investors, and one of the most consistently underutilised. Many investors are either unaware of how it works, uncertain about what they can claim, or simply haven’t taken the steps to formalise their entitlements.
If you own an investment property and you are not claiming depreciation, you are very likely leaving money on the table each financial year.
What property depreciation is
When you own an investment property, the physical assets within that property gradually wear out over time. The building structure itself, the flooring, the appliances, the carpet, the hot water system, the blinds. The Australian Taxation Office recognises this wear and allows property investors to claim a deduction for this decline in value each year, even though no money actually leaves your pocket.
This non-cash deduction reduces your taxable income in the same way that interest payments or property management fees do, except that depreciation requires no ongoing expenditure on your part. It is simply a recognition of the asset’s natural aging.
The two categories of depreciation
Property depreciation in Australia is split into two main categories. The first is Division 43, which covers the building structure itself, the walls, roof, floors, and permanent fixtures. This is calculated as a percentage of the original construction cost and is only available on properties built after July 1985.
The second is Division 40, which covers plant and equipment items, things like carpets, ovens, air conditioning units, and hot water systems. These items are depreciated individually at rates that reflect their effective useful life, which means some items can be claimed over a relatively short period.
Why you need a quantity surveyor
To claim depreciation accurately and fully, you need a tax depreciation schedule prepared by a qualified quantity surveyor. This is a document that itemises every depreciable element of your property, assigns the correct value and depreciation rate to each, and provides your accountant with the figures they need to include in your tax return.
The cost of a depreciation schedule is itself tax deductible, and for most investment properties it pays for itself many times over in the tax savings it generates in the first year alone.
New vs established properties
New properties typically offer the highest depreciation benefits, as everything is new, values are higher, and the full construction cost is available for Division 43 claims. However, established properties can still yield meaningful depreciation deductions, particularly where recent renovations have been carried out or where plant and equipment items are relatively new.
A quantity surveyor will assess what is legitimately claimable regardless of the property’s age and ensure the schedule is compliant with current ATO guidelines.
Common mistakes to avoid
The most common mistake is simply not having a depreciation schedule prepared at all. A close second is purchasing a depreciation schedule from an unqualified provider or one that does not comply with the rules introduced in the 2017 Federal Budget, which changed how depreciation on second-hand plant and equipment can be claimed.
Getting this right from the moment you settle on a property, and reviewing your schedule each year with your accountant, ensures you are maximising a benefit that is built into the cost of owning an investment property.
Understanding all the financial levers available to you as a property investor makes a material difference to your long-term returns. The Mirren team works with investors to ensure every aspect of their investment strategy is working as hard as possible. Book a free consultation with the Mirren Investment Properties team today.
