Depreciation is one of the most powerful — and underused — tax strategies available to property investors. It allows you to claim a deduction for the natural wear and tear of a property over time, reducing your taxable income without any actual cash outlay.
What is property depreciation?
The ATO allows investors to claim depreciation on two categories: the building structure itself (capital works, Division 43) and the fixtures and fittings inside (plant and equipment, Division 40). Both reduce your taxable income in the year the deduction is claimed.
Division 43 vs Division 40
- Division 43 (Capital works): Depreciation of the building structure at 2.5% per year over 40 years. Applies to properties constructed after 16 September 1987.
- Division 40 (Plant and equipment): Depreciation of items within the property — carpets, appliances, blinds, hot water systems. Each item depreciates at its own rate.
How much can you actually claim?
On a new property valued at $700,000, total depreciation deductions in the first year can commonly range from $15,000 to $25,000 or more — potentially saving $7,000–$12,000 in tax depending on your marginal rate.
Do you need a quantity surveyor?
Yes. To claim depreciation deductions, you need a formal Tax Depreciation Schedule prepared by a qualified quantity surveyor. This is a one-off cost (typically $600–$900) and is itself tax deductible.
Important: Rules around depreciation for second-hand properties changed in 2017. For properties purchased after 9 May 2017, plant and equipment deductions are generally only available for new assets installed by the investor — not pre-existing items. New properties are not affected.