Property investing isn’t just about rental income and capital growth. One of the most underutilised tools available to investors is depreciation—an often misunderstood tax deduction that can deliver thousands in savings each year.
Depreciation allows you to offset the natural wear and tear of your investment property against your taxable income. For smart investors, it’s a strategy that helps improve cash flow and reduce tax bills—without having to spend an extra cent.
What Is Property Depreciation?
Depreciation is the decline in value of the assets within your investment property. The ATO allows property investors to claim this as a non-cash tax deduction. That means you’re not spending money year to year, but you’re still getting a deduction for the decrease in value of certain items.
There are two types of depreciation you can claim:
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Capital Works (Division 43): This covers the building’s structure—things like bricks, walls, flooring, roofing, and fixed assets such as kitchen cabinets. Generally, these are claimed at a rate of 2.5% per year over 40 years, starting from when construction was completed.
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Plant and Equipment (Division 40): This refers to removable assets such as appliances, carpets, blinds, hot water systems, and air conditioners. These items are depreciated over a shorter lifespan using set rates defined by the ATO.
Who Can Claim Depreciation?
If you own an investment property and it generates income, chances are you’re eligible to claim depreciation. However, the amount you can claim depends on several factors:
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Age of the property: Older homes can still attract capital works deductions if they were built after 1987. For plant and equipment, the rules changed in 2017. You can no longer claim depreciation on second-hand items in a property purchased after 9 May 2017, unless you installed them yourself.
- Property condition: The better the condition of the building and fixtures, the more value you may be able to claim.
- Renovations: Any improvements or upgrades you’ve made—whether it’s a new kitchen or bathroom—could add to your depreciation schedule.
Why a Depreciation Schedule Matters
To legally claim depreciation, you’ll need a depreciation schedule prepared by a qualified quantity surveyor. This is a detailed report that outlines all depreciable items in your property and their estimated decline in value over time.
While there’s a cost involved (typically between $400 and $800), it’s usually 100% tax-deductible. And the potential return far outweighs the upfront fee—many investors recoup the cost within the first year through tax savings.
Real-World Example
Let’s say you purchase a newly built investment property worth $600,000. A quantity surveyor determines that the combined capital works and plant and equipment depreciation is $12,000 in the first year.
If your marginal tax rate is 37%, you could reduce your tax bill by over $4,400 that year. That’s money back in your pocket—without increasing rent or taking on more risk.
How Depreciation Affects Cash Flow
Because depreciation is a non-cash deduction, it reduces your taxable income without reducing your bank balance. This is especially helpful for negative gearing strategies where rental income doesn’t cover your mortgage and expenses. By claiming depreciation, you can soften the blow of the shortfall and improve your cash flow position.
Over time, these savings can be reinvested—whether in property maintenance, another asset, or simply used to build a financial buffer.
Don’t Forget to Claim Renovations
One common oversight among property investors is forgetting to claim depreciation on renovations. If you’ve upgraded the kitchen, added new flooring, or installed a split system, those improvements could be depreciated over time.
Even if a previous owner made the renovations, you may still be able to claim capital works deductions, provided they were completed after 1987. This is why a comprehensive depreciation schedule is so important—it accounts for improvements you may not even know about.
Why It Pays to Get the Right Advice
Depreciation is complex and highly individual. That’s why professional advice is crucial. Many accountants Melbourne based experts specialise in investment property tax and work alongside quantity surveyors to help clients maximise their returns.
An experienced accountant will:
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Ensure your depreciation claims align with ATO requirements
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Interpret the schedule in the context of your broader tax position
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Help integrate depreciation into your long-term investment strategy
They can also advise you on how depreciation interacts with capital gains tax when you eventually sell the property. It’s about more than just deductions—it’s about understanding how every moving part affects your financial future.
Final Thoughts
If you’re a property investor and you’re not claiming depreciation, you’re probably leaving money on the table. Whether you own a brand-new unit or a renovated townhouse, depreciation can make a significant difference to your annual return.
Getting a depreciation schedule is a one-time task with multi-year benefits. Pair that with guidance from experienced accountants Melbourne based professionals, and you’ll be in a stronger position to grow your portfolio, reduce your tax, and improve your investment cash flow—without needing to raise the rent or cut corners.
For serious investors, it’s not just about buying right—it’s about claiming right.
