Depreciation 101: What Every Property Investor Needs to Know

Property investment can be financially rewarding either through rental income or capital growth. But to maximise your financial position, property investors should also understand how to make the most of the available tax benefits, including depreciation.

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Depreciation refers to the natural wear and tear that occurs to a building and its fixtures over time. 

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The Australian Taxation Office (ATO) allows property investors to claim this loss in value as a tax deduction – helping you offset rental income and reduce your taxable income.

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In simple terms, depreciation means you pay less tax and can have more money back in your pocket at tax time.

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The Two Types of Depreciation

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There are two main categories of depreciation you can claim as a property investor.

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1. Capital Works Deductions

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This covers the building’s structural elements (walls, roof, windows, and doors) as well as fixed items like tiles, kitchen cupboards, and bathroom fittings.

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The capital works deductions applies to residential properties built after July 1985, and can be claimed at 2.5% per year for up to 40 years.

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2. Plant and Equipment Deductions Plant and equipment are the removable or mechanical assets inside the property, such as:

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• Air conditioners
  
  
• Ovens and cooktops
  
  
• Hot water systems
  
  
• Carpet and blinds
  
  

It’s important to note, as of May 2017, you can only claim depreciation on new plant and equipment assets you purchase for a second-hand residential investment property.

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Why Depreciation Matters for Investors

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Claiming depreciation is important to  maximise your returns.

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For example:

• A typical residential investor could claim thousands of dollars per year in depreciation deductions.
  
  
• This means you pay less tax or have more money in your bank account come tax time.
  
  

Engaging a Quantity Surveyor

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To unlock the full benefits of depreciation, it’s wise to engage a quantity surveyor. 

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A quantity surveyor is a tax depreciation specialist who can inspect your property and produce a tax depreciation schedule.

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This schedule outlines exactly how much you can claim each year and is submitted to your accountant as part of your tax return.

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Tip: The cost of a depreciation schedule is also tax-deductible.

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What About Older Properties?

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You can still claim depreciation on older properties, particularly under capital works if the building was constructed after 1985. And if you’ve made renovations or improvements, you may be able to claim those costs too, even if they were done by a previous owner.

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Depreciation and Property Strategy

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Whether you're:

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• Holding for long-term growth
  
  
• Looking to increase rental yield
  
  
• Or planning to add value through renovations…

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…depreciation plays a vital role in your overall investment strategy. 

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The additional cash flow it brings can help you service your loan, cover maintenance costs, or save for your next property.

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Talk to the Experts

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All the tax information provided in this article is of general nature only. For more specific advice tailored to your unique circumstances it’s best to speak to a qualified accountant.

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At Rent Choice, we work closely with investors to help them maximise their property’s potential through strategic leasing, proactive property management, and connections to trusted professionals, including quantity surveyors and tax specialists.

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