Depreciation is one of the most powerful and least understood tax deductions available to Australian investment property owners. Unlike most deductions, depreciation is a non-cash deduction — you don’t spend money to claim it, but it reduces your taxable rental income. Over the life of an investment property, depreciation deductions can significantly reduce the tax you pay on rental income.
What Is Property Depreciation?
When an investment property is built or renovated, the building structure and its fixtures and fittings gradually wear out over time. The ATO allows investment property owners to claim a tax deduction for this decline in value — even though no cash is actually spent. This deduction is called depreciation.
There are two categories of depreciation for investment properties:
Division 43 — Capital Works Deduction (Building Write-Off)
Division 43 covers the building structure itself: brickwork, concrete, roofing, fixed windows, wiring, plumbing.
- Deduction rate: 2.5% per annum of the original construction cost
- Available for properties where construction commenced after 15 September 1987
- Continues for 40 years from the date of construction
- Claimable by any investor who owns an eligible property — regardless of when it was built (as long as the 40-year window hasn’t expired)
Example:
- Building construction cost: $280,000
- Division 43 deduction: $280,000 × 2.5% = $7,000/year
Division 40 — Plant and Equipment Depreciation
Division 40 covers removable fixtures and fittings — items that can be detached from the building: carpet, blinds, dishwasher, hot water system, air conditioning, stove, ceiling fans.
- Depreciation rate varies by item based on its effective life (ATO schedule)
- Claimed at either the prime cost method (straight line) or diminishing value method (front-loaded)
Important rule change (May 2017): For properties purchased on or after 9 May 2017, Division 40 depreciation can only be claimed on new plant and equipment installed by the current owner. Previously used items installed by a prior owner are no longer depreciable for a subsequent investor purchaser. Division 40 on new renovations or new builds remains fully claimable.
Who Needs a Quantity Surveyor?
A quantity surveyor (QS) prepares a formal tax depreciation schedule for your property — estimating the original construction cost (for Division 43) and the value and effective life of all depreciable plant and equipment (for Division 40).
The ATO accepts quantity surveyor reports as the basis for depreciation claims. The ATO does not require a QS report but it is the most reliable way to substantiate claims.
Cost of a QS report: Typically $600–$800 for a standard residential investment property. This fee is itself a deductible expense.
Who benefits most from a QS report:
- Investors in properties built after 1987 with significant construction costs
- Properties with recent renovations or fit-outs
- New builds (maximum Division 43 + Division 40 deductions available)
Older properties (pre-1987 construction) have no Division 43 entitlement but may still have Division 40 claimable on any new plant/equipment.
Example — Depreciation Schedule for a Newer Investment Property
Property details:
- Purchased: 2024, valued at $750,000
- Building construction cost (estimated by QS): $320,000
- Plant and equipment (new, QS itemised): $25,000
Year 1 depreciation claims:
- Division 43 (2.5% × $320,000): $8,000
- Division 40 (diminishing value on $25,000 — year 1 high deductions): ~$4,500
- Total year 1 depreciation: ~$12,500
At a 37% marginal rate: $12,500 × 37% = $4,625 tax saving in year 1 from depreciation alone — with no cash spent.
Depreciation Reduces Your Cost Base
The ATO requires that depreciation claimed under Division 43 reduces the property’s cost base for CGT purposes. This means when the property is eventually sold, the cost base is lower — increasing the capital gain. Investors should factor this into their long-term tax planning.
Plant and equipment depreciation claimed (Division 40) reduces the cost base of those specific items.
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Frequently Asked Questions
Can I claim depreciation on an old property? Division 43 (building write-off) is only available for properties where construction commenced after 15 September 1987. If the building is older, you cannot claim Division 43 — but you may be able to claim Division 40 on any new plant and equipment you install. A quantity surveyor can confirm what is claimable.
Do I need to physically visit the property for a QS report? Most quantity surveyors can prepare a depreciation schedule based on a site inspection (which they conduct). You don’t need to be present. Some firms offer desktop reports for older properties with limited claimable items.
What happens to depreciation if I sell the property? Division 43 deductions claimed reduce the cost base for CGT on the building component. Plant and equipment items that were depreciated below their written-down value may trigger a balancing charge (taxable amount) if sold above that value. A tax accountant should review this at time of sale.
This article provides general financial information only. Tax outcomes depend on individual circumstances. Always consult a registered tax agent or accountant for your specific situation. For advice on your investment strategy, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.