Understanding Investment Property Depreciation
Property depreciation is often described as the "invisible" tax deduction. Unlike cash expenses such as interest or property management fees, depreciation is a non-cash deduction that can significantly improve your holding position.
What is Property Depreciation?
As a building gets older, its structure and the assets within it wear out. The Australian Taxation Office (ATO) allows property investors to claim this wear and tear as a tax deduction. This deduction is split into two distinct categories: Capital Works (Division 43) and Plant & Equipment (Division 40).
Capital Works (Division 43)
This relates to the structural elements of a building. Think of the bricks, mortar, concrete slab, roof, and fixed structural items. Generally, you can claim a 2.5% deduction per year on the historical construction cost for up to 40 years from the date construction was completed.
Note: This generally applies to residential properties built after September 15, 1987.
Plant & Equipment (Division 40)
These are the easily removable fixtures and fittings within the property. Examples include carpets, blinds, ovens, air conditioners, and hot water systems. Each item has an effective life determined by the ATO and depreciates at different rates.
Following changes in 2017, investors can only claim depreciation on Plant & Equipment assets they purchased brand new. Second-hand assets in established properties acquired after May 9, 2017, are no longer deductible.
How to Claim It
To claim these deductions accurately, you need a Tax Depreciation Schedule prepared by a qualified quantity surveyor. They will inspect the property, identify all depreciable assets, determine construction costs, and provide a report spanning the 40-year life of the property.
The fee for a depreciation schedule is fully tax-deductible in the year you pay for it, making it one of the highest ROI investments you can make for your portfolio.
Use our Depreciation Calculator to estimate your Division 43 and Division 40 deductions before commissioning a full schedule. For the full picture of how depreciation improves your holding position, run it alongside our Cash Flow Calculator.