Understanding Apartment Depreciation in Australia: A Comprehensive Guide 

The world of property investment can be complex, particularly when understanding tax benefits and financial strategies.  

One often overlooked yet significant advantage for apartment investors in Australia is the concept of depreciation.  

This guide breaks down the essentials of apartment depreciation, helping investors with their tax benefits and making informed decisions about their property investments. 

What is Apartment Depreciation? 

Apartment depreciation refers to the gradual decrease in the value of an apartment building and its assets over time due to factors such as wear and tear, age, and obsolescence. The Australian Taxation Office (ATO) allows owners of income-producing properties, including apartments, to claim this depreciation as a tax deduction.  

This means that property investors can reduce their taxable income by accounting for the depreciation of both the building’s structure and its assets, such as plant and equipment. By doing so, they can potentially lower their tax liability and improve their overall return on investment. 

Benefits of Claiming Depreciation Deductions 

Claiming depreciation deductions offers significant financial benefits for property investors. By accounting for the depreciation of their investment properties, investors can reduce their taxable income, which in turn can lead to a lower tax bill.  

This reduction in taxable income can result in increased cash flow, providing investors with more funds to reinvest or cover other expenses. Additionally, depreciation deductions can be used to offset other costs associated with the property, such as interest on loans and property management fees. This makes claiming depreciation a valuable strategy for maximising the financial returns on investment properties. 

Types of Depreciation Expenses 

When it comes to apartment buildings, there are two main types of depreciation expenses that property investors can claim: capital works and plant and equipment. Capital works depreciation refers to the wear and tear on the building’s structure, including elements such as walls, floors, and ceilings.  

On the other hand, plant and equipment depreciation covers the wear and tear on assets within the property, such as appliances, carpets, and blinds. Each type of depreciation has its own set of rules and rates, making it essential for investors to consult with a tax professional to ensure they are claiming the correct amounts and maximising their tax benefits. 

Houses vs Apartments for Investment Property 

A Quantity Surveyor must consider many factors when calculating how much depreciation is required for a residential rental property. One of those factors is the property type, between apartments and houses. 

While there are many similarities in how depreciation is calculated for both houses and apartments, such as age of the property and purchase price, there are differences when you look at how the properties are built. 

Building Costs and Depreciation Deductions Rates 

Houses will generally have a larger gross floor area than an apartment with the same number of bedrooms, but an apartment unit will require more labour to build as multiple floors need to be accounted for which makes their build cost comparable to a house for capital works (Division 43).  

Unlike commercial and industrial properties, which may have different depreciation considerations, apartment units require more labor to build due to multiple floors. This is especially the case for brand new apartment units with multiple floors. 

Calculating Rental Property Depreciation 

Calculating rental property depreciation can be a complex process, but it is crucial for maximising tax deductions. The Australian Taxation Office (ATO) provides guidelines on how to calculate depreciation, including the use of the Prime Cost and Diminishing Value methods.  

The Prime Cost method spreads the depreciation evenly over the asset’s effective life, while the Diminishing Value method accelerates the depreciation in the earlier years. To simplify the process, investors can use a tax depreciation schedule, which outlines the depreciation expenses for each asset. 

Consulting with a tax professional is highly recommended to ensure the correct method is used and the appropriate amounts are claimed. You can also use our rental property depreciation calculator to get a rough estimate of your potential savings. 

Strata Depreciation Claims  

Apartment units can claim a portion of the common areas which adds to the depreciation they can claim under plant & equipment (Division 40). 

This can lead to situations where an apartment unit can cost more to build than a house despite the smaller gross floor area. This means an apartment unit owner can claim the same or more depreciation on Division 43 Capital Works than a house. 

According to the Strata Community Association (SCA) common property depreciation can increase an investor’s tax deductions. Another key difference is how much Plant & Equipment (division 40) the two property types can claim. 

While both houses and apartments can claim standard plant and equipment such as oven, light shades and blinds, owners can also claim a portion of the strata equipment in the common areas of the apartment. 

This includes common items such as lifts, gym equipment and fire extinguishers, which can be claimed under Division 40 Plant and Equipment assets. 

State-by-State Depreciation  

The Property Council of Australia reports different depreciation rates across the states, due to the following: 

• Local construction costs 

• Building regulations 

• Property market conditions 

• State specific tax considerations 

• These varying rates can significantly impact the rental income and tax deductions for property investors in different states. 

Depreciation Examples 

To show the higher depreciation yields, here are three brand new three-bedroom properties built in 2017 used as examples and their estimated depreciation over three years: 

For example, a plant and equipment asset like an air conditioning unit in a high-rise apartment may have a different depreciation rate compared to a similar asset in a residential house. 

How to Record Depreciation Expenses 

To effectively claim depreciation expenses, property investors must maintain accurate records of their property’s depreciation. This includes keeping detailed records of the property’s purchase price, construction costs, and any renovations or improvements made.  

Additionally, investors should document the depreciation expenses claimed each year, specifying the type of depreciation and the amount claimed. Utilising a tax depreciation schedule can help investors keep track of their depreciation expenses and ensure they are claiming the correct amounts. Proper record-keeping is essential for maximising tax benefits and complying with tax regulations.                                                 

Why Property Investors Should Work with Quantity Surveyors 

The Australian Institute of Quantity Surveyors (AIQS) recommends working with qualified professionals who understand the depreciation calculations for investment properties. This is especially important for apartment investments where common property calculations add another layer of complexity. 

Top Depreciation Claim Errors to Avoid 

According to the Tax Practitioners Board, these are the common mistakes: 

• Not claiming common property depreciation 

• Incorrectly classifying capital works vs plant and equipment 

• Missing residual value claims 

• Incorrect effective life calculations 

• Not maintaining an accurate property depreciation schedule 

Maximising Tax Benefits Through Depreciation 

This source of depreciation allows apartment unit owners to claim more depreciation than houses especially in the first few years of depreciation. But only if they are eligible to claim on Division 40 items as per the Treasury Laws Amendment (Housing Tax Integrity) Act 2017. 

In summary, due to the higher cost to build and eligible to claim strata items, an apartment unit owner will generally get a higher tax deduction per year than a house owner ceteris paribus. 

But depreciation is only one of the factors to consider when deciding to buy a house or unit for investment. Accurately reporting rental income and expenses can further enhance the financial benefits of claiming depreciation. 

Historical Trends in Apartment Depreciation 

CoreLogic’s data and insights indicate that depreciation claims for investment properties are influenced by several factors. Rising construction costs, as tracked by CoreLogic’s Cordell Construction Cost Index (CCCI), have been a significant driver.  

Over the past decade, residential construction costs have increased due to higher material and labor expenses, with annual growth rates reaching 3.4% in 2024 alone. These rising costs affect property valuations and depreciation schedules, enabling investors to claim higher deductions on newer builds or renovations 

Newer apartments and houses have more depreciation but there is still depreciation in older homes, so it’s worth getting a report. 

Did you know over 60% of Australians miss out on depreciation in Australia? Over 65% of our clients have bought depreciation schedules for second-hand or existing properties. Contact us now to find out if we can help. 

While apartment depreciation claims have grown, commercial and industrial properties have their own unique depreciation trends and considerations. 

Key Takeaways 

• Property investors in Australia can claim tax deductions for wear and tear on both their apartment building and its contents, helping reduce their tax bill. 

• Apartments often offer better tax benefits than houses because investors can claim depreciation on shared facilities like gyms and elevators. 

• Two types of claims are possible: one for the building structure (Capital Works) and another for removable items (Plant and Equipment). 

• Different states have different rules and rates for depreciation based on local building costs and regulations. 

It’s recommended to work with a qualified surveyor to calculate these deductions correctly, especially for apartments.