Depreciation is one of the most valuable tax deductions available to Australian property investors, but most never claim it properly. Most investors claim interest and rates without a second thought, but skip depreciation entirely because it feels complicated.
That’s an expensive mistake. A quality depreciation schedule can add anywhere from a few hundred to several thousand dollars back into your pocket each financial year, in the form of reduced tax. For negatively geared investors trying to manage holding costs, that matters.
This guide explains how depreciation works, what you can claim, and why getting a proper schedule done is almost always worth the cost.
What is Property Depreciation?
Depreciation is the natural wear and tear of a building and its fixtures over time. The ATO allows property investors to claim this wear and tear as a tax deduction, even though no cash actually leaves your account.
It works like this: a brand new oven installed in your rental property doesn’t last forever. The ATO recognises that it loses value each year, and lets you deduct a portion of that decline in value against your taxable income.
There are two distinct categories of depreciation claims for investment properties.
Division 43 - capital works
Division 43 covers the structural components of the building itself. Think the concrete slab, brickwork, roof, internal walls, and fixed structural items like built-in wardrobes and kitchen cabinets.
The ATO allows investors to claim 2.5% of the original construction cost each year, for up to 40 years from the date construction was completed. A property that cost $300,000 to build could generate $7,500 per year in Division 43 deductions alone, provided construction commenced after 15 September 1987.
Construction date matters here. Properties where construction commenced before 18 July 1985 are not eligible for Division 43 at all. Those built between 18 July 1985 and 15 September 1987 can claim at a reduced 4% rate rather than 2.5%. Always check before assuming.
Division 40 - plant and equipment
Division 40 covers the removable assets within a property. Dishwashers, air conditioning units, hot water systems, carpets, blinds, ceiling fans, and similar items all fall under this category.
Each item has its own effective life, set by the ATO, and depreciates at either the prime cost or diminishing value method. A split-system air conditioner might have an effective life of 10 years. Carpet might be seven.
Legislation changes in 2017 significantly affected who can claim Division 40 on second-hand assets. If you purchased a property with existing tenants after 9 May 2017, you generally cannot claim depreciation on the pre-existing plant and equipment. You can only claim on assets you install yourself after purchase. This is an area where getting advice from a qualified quantity surveyor and your accountant is important - the rules are specific, and getting them wrong flows through your tax returns for years.
Why investors under-claim depreciation
The ATO does not provide depreciation schedules. Your accountant can only claim what they can substantiate, and without a formal schedule from a qualified quantity surveyor, most items go unclaimed.
A quantity surveyor physically inspects the property, identifies every claimable asset, estimates its value at the time of inspection, and produces a schedule your accountant can use directly. They are also trained to identify original construction costs and apply the right depreciation methods to each asset class.
Most accountants will not estimate plant and equipment values themselves, and rightly so. It is a quantity surveyor’s domain.
A depreciation schedule typically costs $600 to $900 for a standard residential property. That fee is also tax deductible. For investors in higher tax brackets, the first-year depreciation claim alone often returns several times the cost of the report.
How much can you actually claim?
It varies based on the age of the property, construction quality, and what fixtures are included. Here are some general ranges to give you a sense of scale.
A brand new house or townhouse might generate depreciation deductions of $10,000 to $20,000 or more in the first year, tapering off over time as assets reach the end of their effective lives. A newer apartment with quality finishes can produce similar numbers.
An older property built after 1987 but not recently renovated will generate more modest claims, primarily through Division 43 at 2.5% of construction cost, with limited plant and equipment unless the owner has upgraded fixtures.
A property built before 1987 with no renovations may have almost nothing claimable. That’s not a reason to avoid older properties - established suburbs often outperform on capital growth. It’s just a realistic expectation to set going in.
New properties vs established properties
New properties have a clear depreciation advantage. Every item is brand new, claimable at full value, and the construction cost is known. Off-the-plan purchases often come with a depreciation schedule from the developer’s quantity surveyor as part of the settlement package. Worth noting: higher upfront depreciation does not automatically make a new build a better investment. The depreciation benefit typically offsets the developer premium built into the purchase price, and established properties on good land size tend to outperform on capital growth over time.
Established properties are more nuanced. Division 43 claims are still available if the building was constructed after September 1987, and any renovations completed by the current or previous owner can add claimable construction costs. A $50,000 kitchen renovation by the previous owner, for example, restarts the clock on the structural components of that work.
If you have renovated an investment property yourself, make sure your quantity surveyor knows about all works completed and approximate costs. It directly affects what you can claim.
How depreciation affects your cash flow
This is where depreciation becomes tangible for investors managing holding costs. Depreciation is a non-cash deduction - you are not actually spending money, but the ATO treats it as an expense against your rental income.
An investor on $80,000 taxable income who claims $10,000 in depreciation drops to $70,000. At the 30% marginal rate plus the 2% Medicare levy under the 2025-26 rates, that’s $3,200 back in real tax savings, more than four times the cost of a depreciation schedule. An investor on $200,000-plus saves $4,700 on the same deduction. Even at the lower end of the tax brackets, the return typically exceeds the schedule cost in year one.
For negatively geared investors, this effect compounds. The combination of interest deductions, property expenses, and depreciation can reduce the real after-tax cost of holding a property well below what the headline numbers suggest. Our post on capital growth vs rental yield covers how holding costs affect strategy in more detail.
See how depreciation reduces your after-tax holding costs. Adjust the depreciation amount to compare scenarios.
Use the calculator →
Getting your schedule done right
A few practical things worth knowing before you engage a quantity surveyor.
You only need one schedule per property. A well-prepared schedule covers the entire depreciation life of the property - typically 40 years - and is valid for as long as you own it. You do not pay for a new one each year.
If your existing schedule is several years old and you have completed renovations since then, you will need an updated report or an addendum to account for the new works.
Use a quantity surveyor who is a member of the Australian Institute of Quantity Surveyors (AIQS). Credentials matter here because the ATO can audit depreciation claims, and a poorly prepared schedule creates real risk.
Make sure your accountant receives the schedule before your return is lodged. Adding depreciation retrospectively means filing an amendment - extra work, delays, and occasionally scrutiny you do not need.
What about SMSF-owned properties?
SMSFs that own investment properties can also claim depreciation, and the same Division 40 and Division 43 rules apply. The key difference is the tax rate. Super funds are generally taxed at 15% in accumulation phase, which means each dollar of depreciation delivers less cash benefit than it would for an investor on the top marginal rate. It still reduces the fund’s tax liability - the arithmetic is just different, and worth factoring into your SMSF property analysis.
At Australian Property Experts, commissioning a depreciation schedule is part of the post-purchase checklist we run through with every client. Getting it done in your first financial year of ownership means you do not lose a year of claims.
FAQ
Do I need a depreciation schedule if my property is old? It depends on the construction date. Properties built after September 1987 are eligible for Division 43 claims regardless of age. If the property has been renovated, there may be additional claimable amounts on top of that. A quantity surveyor can assess this quickly and will tell you upfront if a report is not worth the cost - most of them will not charge you to have that conversation.
Can I claim depreciation on a property I live in for part of the year? Depreciation claims need to be apportioned for the period the property was genuinely available for rent. If you used the property privately for three months of the year, you can generally only claim depreciation for the nine months it was rented or available. Your accountant calculates the correct apportionment.
Is depreciation claimable on a property I’m renovating? Only when the property is income-producing. During a renovation where the property is not available for rent, depreciation generally cannot be claimed. The construction costs of the renovation itself become claimable once the property is tenanted, so keep detailed records of every cost as you go.
Does claiming depreciation affect my capital gains tax when I sell? Yes. Division 43 deductions claimed during ownership reduce your cost base for CGT purposes, which increases your capital gain when you sell. This surprises more investors than almost any other tax issue in property. It does not mean you should avoid claiming depreciation - the timing and rate differences usually still make it worthwhile - but factor it into your planning well before you decide to sell, not the week you sign the contract.
Understanding depreciation is one part of building a property portfolio that genuinely works for you. This is general information only and not financial or tax advice. Speak to your accountant or a qualified quantity surveyor about how depreciation applies to your specific property.
If you want to talk through how we approach property selection and the full picture of investor returns, book a free discovery call.
