Yes, you can claim depreciation on your investment property, and for many Australian investors it is one of the most valuable tax deductions available. Depreciation allows you to claim the natural wear and tear of a property’s structure and its fittings as a non-cash deduction each year, reducing your taxable income without spending another dollar.

Yet despite its size as a tax benefit, depreciation is consistently under-claimed. The Australian Taxation Office (ATO) estimates that a significant proportion of investment property owners either miss depreciation entirely or claim far less than they are entitled to. If you own a rental property and have not yet obtained a depreciation schedule, you are almost certainly leaving money on the table every financial year.

What Exactly Is Property Depreciation and How Does It Work?

Property depreciation is the process of claiming the decline in value of a building and its internal assets as a tax deduction over time. The ATO recognises that properties and their fittings do not last forever, so it allows investors to write off that cost progressively across the asset’s useful life.

There are two distinct categories of depreciation available to investment property owners:

• Division 43 (Capital Works Deductions): This covers the structural elements of the building itself, including walls, roofs, flooring, windows, and built-in cupboards. Eligible properties built after 16 September 1987 can be depreciated at a rate of 2.5% per year over 40 years. Properties built between 19 July 1982 and 15 September 1987 use a 4% rate over 25 years.
• Division 40 (Plant and Equipment): This covers removable assets inside the property such as carpets, blinds, dishwashers, hot water systems, air conditioning units, and smoke alarms. Each item has its own effective life as determined by the ATO, and is depreciated individually using either the Prime Cost or Diminishing Value method.

According to BMT Tax Depreciation, one of Australia’s largest quantity surveying firms, the average first-year depreciation deduction across a sample of residential investment properties is around $9,000 to $12,000. For investors on a marginal tax rate of 37%, that translates to a real cash saving of roughly $3,330 to $4,440 in the first year alone.

For a deeper breakdown of how both divisions apply to different property types, the team at Collings Real Estate has put together a detailed guide on depreciation on investment property that walks through every key scenario.

Who Can Claim Depreciation on an Investment Property in Australia?

Not every investor qualifies for every category of depreciation. The rules changed significantly on 1 July 2017 following legislative amendments, and it is important to understand where you stand.

Division 43 (Building Structure)

Any investor can claim Division 43 deductions provided the property was built after the relevant threshold dates mentioned above. This applies regardless of whether you purchased the property new or second-hand. The construction cost is what determines the deduction, not who built it or when you bought it.

Division 40 (Plant and Equipment)

This is where the 2017 rule change bites. Under the current rules:

• If you purchased a brand-new property after 1 July 2017, you can still claim depreciation on all plant and equipment assets.
• If you purchased a second-hand property after 7:30 pm AEST on 9 May 2017, you can only claim depreciation on plant and equipment assets that you yourself installed (not those already in the property at the time of purchase).
• Investors who purchased before that date or who hold properties through certain entity structures may still have existing entitlements, so always verify with your accountant.

This distinction matters enormously when assessing the tax value of a potential purchase. If you are still evaluating whether a particular property stacks up, the guide on how to analyse any property before you buy covers depreciation as part of the broader financial assessment.

What Is a Depreciation Schedule and Do I Really Need One?

A depreciation schedule is a formal report prepared by a qualified quantity surveyor that lists every depreciable asset in your investment property, assigns each an effective life and depreciation rate, and calculates the deductions you can claim each year. The ATO requires that Division 43 deductions be supported by a quantity surveyor’s report; your accountant cannot simply estimate the figures.

The cost of a depreciation schedule for a typical residential property ranges from approximately $550 to $770 including GST, and that fee is itself tax-deductible as a property management expense. Given the deductions the schedule unlocks, the report typically pays for itself many times over in the first year.

When choosing a quantity surveyor, look for a member of the Australian Institute of Quantity Surveyors (AIQS). The ATO specifically references AIQS members as qualified to provide construction cost estimates for depreciation purposes.

A good depreciation schedule will include:

1. A full Division 43 capital works schedule with annual deductions over the remaining 40-year life
2. A complete Division 40 plant and equipment register
3. Both Prime Cost and Diminishing Value calculations so your accountant can choose the most advantageous method
4. Low-value pooling recommendations for assets valued under $1,000
5. Deductions projected over at least 10 years for long-term planning

How Much Tax Can Depreciation Actually Save Me Each Year?

The dollar impact of depreciation varies considerably depending on the age of the property, the construction quality, the number of plant and equipment assets, and the investor’s marginal tax rate. However, the numbers are consistently significant.

To illustrate with a real-world example: a modern two-bedroom apartment in Melbourne with a construction cost of $320,000 would generate a Division 43 deduction of $8,000 per year (2.5% of $320,000) for 40 years. Add Division 40 deductions for carpets, appliances, and fittings, and the first-year total might reach $12,500 or more. An investor on a 39% combined marginal rate (including the Medicare levy) would save approximately $4,875 in tax in that single year.

According to ATO statistics, residential rental property is the most common source of rental deductions for Australian taxpayers, with over 2.2 million individuals reporting rental income in the 2022-23 income year. Yet quantity surveying industry data consistently shows that a large proportion of these investors do not have a current depreciation schedule in place.

It is also worth noting that depreciation interacts directly with your overall property tax position. Claiming higher depreciation reduces your taxable rental income, which can affect your land tax assessments, negative gearing position, and capital gains tax obligations when you eventually sell. Getting across the full picture of property tax implications for investment property owners helps you structure your portfolio for the best long-term outcome.

What Happens to Depreciation When I Sell the Property?

This is the question many investors overlook until it is too late. When you sell an investment property, the depreciation deductions you have claimed over the years reduce your cost base for capital gains tax (CGT) purposes. This means a higher capital gain is recognised at the time of sale.

Specifically:

• Division 43 deductions claimed since 13 May 1997 are deducted from the cost base of the property, potentially increasing your CGT liability at sale.
• Division 40 plant and equipment is treated separately. If you sell an asset for more than its depreciated value, a balancing adjustment (depreciation recapture) may apply, adding taxable income in the year of sale.

None of this means you should avoid claiming depreciation. The present-value benefit of reducing your tax today almost always outweighs the future CGT impact, particularly when you factor in the 50% CGT discount available to individual investors who hold the property for more than 12 months. Your accountant can model both scenarios to confirm the net benefit for your specific situation.

How Do I Get Started with Claiming Depreciation?

The process is straightforward once you know the steps:

1. Commission a depreciation schedule from a registered quantity surveyor. Provide them with the property address, settlement date, and any invoices for improvements you have made.
2. Share the schedule with your accountant before lodging your tax return. They will apply the correct deductions under Division 43 and Division 40.
3. Update the schedule after any significant renovation or capital improvement to capture additional deductions.
4. Review your schedule annually if you install new plant and equipment assets, as these need to be added to your register.

If you have owned your investment property for several years without a schedule, it may be possible to lodge an amended tax return for up to two prior years to back-claim missed deductions. Ask your accountant whether this is worthwhile in your situation.

For investors still deciding whether property is the right vehicle for building wealth, it helps to understand the full financial picture first. The comprehensive overview at Property Investment 101: Complete Beginner’s Guide covers depreciation alongside rental yields, cash flow, and financing so you can make a fully informed decision from the start.

Conclusion

Depreciation is a legitimate, ATO-approved deduction that can meaningfully improve the cash flow of your investment property each year. Whether you own a brand-new apartment or a post-1987 house, a professionally prepared depreciation schedule is one of the most cost-effective steps you can take as a property investor. Commission the schedule, share it with your accountant, and make sure you are claiming every dollar you are entitled to.