What is Property Tax Depreciation?

Depreciation refers to the natural decline in value of assets over time due to wear and tear. When it comes to investment properties, depreciation applies to two categories: Capital Works (such as the building structure) and Plant and Equipment (like appliances and fittings). These are treated differently for tax purposes, so it’s important to calculate depreciation correctly to get the most out of your deductions.

The Australian Taxation Office (ATO) recognises that these assets wear out over time and allows investors to claim deductions accordingly. These deductions reduce your taxable income, which can lower your overall tax bill and improve your cash flow.

There are two methods for calculating residential rental property depreciation: the prime cost method and the diminishing value method. These determine how much can be claimed each year and how quickly the deductions are applied.

To claim tax deductions, investors typically rely on a tax depreciation schedule: an ATO-compliant report that breaks depreciation into two components: Capital Works (Division 43) and Plant and Equipment (Division 40). This schedule provides a year-by-year breakdown of deductible amounts, ensuring you don’t miss out on any tax savings.

There are, generally, two types of rental property depreciation you can claim on your investment property.

Capital Works deductions apply to the structural elements of a building and items fixed to it. Examples include:

Eligibility to claim a capital works deduction depends on: 

1. The construction date of your building.
2. The type of building you own or lease.

Additionally, the construction cost of your building, accurately determined by a qualified quantity surveyor, significantly impacts the amount of depreciation you can claim.

Plant and Equipment assets, which are considered depreciating assets, are generally detachable items with shorter lifespans compared to structural elements of rental properties. These items allow for accelerated depreciation claims due to their faster wear and tear. 

Residential Properties: Ovens, range hoods, air-conditioning units, smoke alarms, downlights, electric garage doors. Commercial Properties: Fire hydrant boosters, hot water units, door closers, coffee machines, warehouse cranes. 

There are two questions we always ask investors to answer: 

1. When were your assets installed? 
2. What type of assets do you own or lease? 

It’s important to note that from 9 May 2017, the rules around depreciation changed. If you purchase a second-hand residential investment property, you can no longer claim depreciation on existing Plant and Equipment, unless the property has undergone substantial renovations.

However, if you install new Plant and Equipment after purchasing the property, those items are still eligible for depreciation deductions. These changes only apply to Plant and Equipment; Capital Works deductions (for the building structure) remain unaffected.

When it comes to calculating depreciation, property investors have two main methods to choose from: the prime cost method and the diminishing value method.  

How Does The Prime Cost Method Work?

The prime cost method assumes that the value of a depreciating asset decreases uniformly over its effective life.  

This method claims a fixed amount each year, calculated using the formula: Asset’s cost × (days held ÷ 365) × (100% ÷ asset’s effective life).  

What is The Diminishing Value Method?

The diminishing value method assumes that the value of a depreciating asset decreases more rapidly in the early years of its effective life. 

This method claims a percentage of the asset’s cost each year, based on the formula: Base value × (days held ÷ 365) × (200% ÷ asset’s effective life).  

A tax depreciation schedule is a comprehensive report, prepared by a qualified quantity surveyor, that outlines the tax depreciation deductions that can be claimed on an investment property. The schedule considers the property’s construction costs, age, and condition, as well as the value of its fixtures and fittings.

A tax depreciation schedule provides a detailed breakdown of the deductions available over the property’s effective life, typically 40 years. This allows property investors to claim the maximum depreciation they’re entitled to each year, helping to reduce taxable income and improve overall financial returns.

Property investors who sign the contract to purchase a second-hand residential after 7:30 pm on the 9th of May 2017 are no longer eligible to claim depreciation on plant and equipment (division 40).  

Investors can still claim tax depreciation on brand-new plant and equipment like carpet and air-conditioning units. Utilising an investment property depreciation calculator can help investors understand the impact of these changes on their potential tax deductions. 

Additionally, the instant asset write-off threshold is now $20,000 per asset for small businesses with aggregated turnover under $10 million. This applies to assets first used or installed between July 1, 2023, and June 30, 2025. 

Built-to-rent developments are also now eligible for an increased capital works deduction rate of 4% per year, up from the previous 2.5%. This change reduces the depreciation period from 40 years to 25 years for projects where construction commenced after May 9, 2023.

When claiming depreciation deductions, property investors often make several common mistakes that can lead to missed tax savings or even penalties.  

Not Claiming Depreciation At All 

One of the most significant errors is not claiming depreciation at all. Many investors are unaware of the depreciation deductions they are eligible for, resulting in substantial missed opportunities for tax savings. 

Misplacing or Losing Records 

Another frequent mistake is failing to keep accurate records of your property’s assets and their values. Calculating depreciation accurately becomes challenging without precise documentation, which can lead to incorrect claims and affect your tax deductions. 

Not Consulting a Qualified Quantity Surveyor or Professional 

Lastly, consulting with a qualified quantity surveyor or tax professional is crucial. These experts can help you navigate the complex rules and regulations surrounding depreciation, ensuring that you’re claiming the correct deductions.  

They can also assist in preparing a comprehensive tax depreciation schedule, which is indispensable for optimising your tax savings.  

By avoiding these common mistakes, property investors can ensure they are fully leveraging their depreciation deductions and enhancing their investment returns. 

You may be eligible for property depreciation benefits if any of the following scenarios apply: 

• You own a brand-new residential property. 
• Your property qualifies for building depreciation under Division 43. 
• You’ve purchased a second-hand property with minor renovations completed by previous owners.
• You’ve purchased a second-hand property with substantial renovations. 
• You’ve installed new Plant & Equipment in a second-hand property. 
• Your property is part of a Managed Fund or owned by a corporate entity (e.g., Pty Ltd). 
• You’ve converted your Principal Place of Residence (PPOR) into a rental property before July 1, 2017. 
• Your property is commercial or non-residential (e.g., manufacturing facilities or motels). 

If you are unsure whether you qualify, it’s best to speak to one of our experts, costing you nothing to find out if your property is eligible.

The majority of our investors claim an average of $13,000 in tax depreciation on their tax returns in their first year alone.