Property Depreciation Schedule: How It Works for Investors

🏗️ What is property depreciation?🔗

🎯 The essential: It's a non-cash deduction, you don't spend extra money to claim it, the property just ages, and the ATO recognises that.

Depreciation, in the ATO's language, is a deduction for the decline in value of a depreciating asset over its effective life. For property investors, this applies to two things, the building structure itself, and the removable assets inside it.

The key word is non-cash. Unlike interest repayments or council rates, you don't write a cheque to claim depreciation. The deduction simply reflects that buildings and their contents wear out over time, even as the property's market value does the opposite.

📊 The two types: Division 43 and Division 40🔗

Division 43, capital works

Covers the building's structure, brickwork, concrete, roofing, walls, floors, windows and other fixed structural elements. The deduction rate is 2.5% per year over 40 years for eligible residential properties, construction commencing after 16 September 1987. The deduction is based on the construction cost, not the purchase price. A construction cost of $300,000 at 2.5% works out to $7,500 a year, and it applies to both new and established properties, as long as the build date is after the eligibility threshold.

Division 40, plant and equipment

Covers removable or mechanical assets, carpet, blinds, air conditioning units, hot water systems, dishwashers, ovens, ceiling fans and smoke alarms. Each asset has its own effective life set by the ATO and is depreciated individually.

📅 The 2017 rule change you need to know🔗

🎯 The essential: If you buy an established, second-hand residential property, you can generally no longer claim Division 40 depreciation on plant and equipment that was already in the property when you bought it.

From 9 May 2017, the rules around Division 40 depreciation changed significantly. This was a deliberate policy decision to limit deductions on second-hand assets, and it's still current law today.

What's still claimable after the 2017 change:

• Division 43 capital works deductions are fully unaffected by this change.
• Brand-new assets you install yourself after purchase are claimable under Division 40 from the date you install them.
• New properties, never previously used as a residential rental, are completely unaffected, both divisions remain fully claimable.

More detail on exactly what counts as second-hand is available on the ATO's second-hand depreciating assets page.

📋 What is a depreciation schedule?🔗

A depreciation schedule, sometimes called a tax depreciation report, is a report prepared by a registered quantity surveyor that itemises the depreciable value of your investment property's building structure and all eligible plant and equipment assets. It's the document you hand to your accountant at tax time to substantiate your depreciation claims.

• Valid for the life of the property, up to 40 years for Division 43, you pay once and use it every year.
• Covers both the diminishing value and prime cost calculation methods.
• The ATO requires a "qualified person", a registered quantity surveyor, to estimate construction costs for rental properties.

The Australian Institute of Quantity Surveyors maintains a searchable directory if you need to find one.

⚖️ Diminishing value vs prime cost🔗

Diminishing value front-loads deductions, claiming more in early years, declining over time. Prime cost spreads deductions evenly over the asset's effective life, the same annual deduction every year. You choose a method per asset and generally must stick with it.

For most investors, diminishing value tends to win, because the front-loaded benefit improves cash flow in the early years, when the loan balance and interest costs are typically at their highest too.

💡 A simple worked example🔗

Scenario: a newly built investment property, total purchase price $600,000. These figures are illustrative only.

💰 How much it costs, and is it worth it🔗

A depreciation schedule typically costs $400-$700, depending on property type, location and complexity. The report fee is generally tax-deductible in full in the year you obtain it, and it's a one-off cost supporting claims for the life of the property.

For new or near-new properties, the first-year claim often exceeds the report cost many times over, as the worked example above shows. For older properties, it's still worth investigating, even if 2017 rules limit Division 40 claims on existing plant and equipment, Division 43 capital works may still be significant if the property was built after September 1987.

🧭 Who should get a depreciation schedule🔗

🚫 Common mistakes to avoid🔗

Assuming you can claim depreciation on an established property's existing appliances post-2017. You generally can't claim Division 40 on plant and equipment already in the property when you bought it second-hand.

Thinking a depreciation schedule is a one-time claim. It's valid for the life of the property and used every year, not a once-off deduction you claim and forget about.

Not realising the report itself is deductible. The quantity surveyor's fee is generally fully deductible in the year you obtain it, on top of everything the report goes on to unlock.

❓ Frequently asked questions🔗