A property depreciation schedule is a detailed report prepared by a licensed quantity surveyor that outlines the tax deductions an Australian property investor can claim for the decline in value of a building and its assets over time. The Australian Taxation Office (ATO) allows investors to claim depreciation under two categories: Division 40 (plant and equipment items like carpets, appliances, and air conditioning units) and Division 43 (capital works deductions for structural elements like walls, roofs, and floors at 2.5% per year over 40 years). A well-prepared depreciation schedule can generate between $5,000 and $15,000 in annual tax deductions, depending on property type, age, and improvements.
Understanding and using a property depreciation schedule is one of the most effective ways for property investors to reduce their taxable income legally. Many investors miss out on thousands of dollars in deductions each year simply because they do not have a schedule prepared or do not realise they are eligible.
What Is Property Depreciation
Property depreciation is the decrease in value of a building and its assets over time due to wear and tear. The ATO allows investors to claim this decline in value as a tax deduction, effectively reducing taxable income. By accounting for the natural ageing of a property, investors can lower their tax liabilities and improve their annual cash flow.
Claiming depreciation is a legal and ATO-approved method of reducing tax. It is not a loophole. It is a recognised deduction that rewards investors for the ongoing cost of maintaining and owning income-producing assets.
Who Should Use a Depreciation Schedule
A property depreciation schedule is beneficial for:
- Real estate investors: Individuals or entities holding properties for rental income
- Landlords: Owners leasing out residential or commercial properties
- Property managers: Professionals overseeing rental properties on behalf of owners
- Developers: Entities involved in constructing new properties for sale or lease
Both residential and commercial property owners can benefit from a well-prepared depreciation schedule.
Division 40 vs. Division 43
| Division 40 (Plant and Equipment) | Division 43 (Capital Works) | |
|---|---|---|
| What It Covers | Removable assets such as carpets, appliances, blinds, and air conditioning units | Structural elements including walls, roofs, floors, and fixed assets |
| Depreciation Rate | Varies based on each asset's effective life (e.g., air conditioners over 10 years) | 2.5% per year over 40 years for properties built after 18 July 1985 |
| 2017 Tax Reform Impact | Second-hand assets purchased after 9 May 2017 can only be claimed by the owner who incurs the expense | Not affected by the 2017 changes; deductions continue to apply regardless of ownership changes |
| Example Assets | Ovens, dishwashers, hot water systems, smoke alarms, curtains | Foundation, external walls, internal walls, ceiling, roofing |
Benefits of a Depreciation Schedule
- Increases annual tax deductions: Accurately reporting depreciation allows investors to claim higher tax benefits, offsetting rental income
- Improves cash flow: Reduced taxable income leads to larger tax refunds, providing additional funds for reinvestment
- Aligns with ATO requirements: Claiming depreciation is a recognised and legal method, fully supported by the ATO
- The schedule itself is tax-deductible: The cost of obtaining a depreciation report (typically $600 to $800) can be claimed as a deduction
Example investment comparison
| Investor A (Claims Depreciation) | Investor B (No Depreciation Claim) | |
|---|---|---|
| Annual Tax Refund | Receives larger refund due to depreciation deductions | Pays higher taxes, reduces overall cash flow |
| Net Income Impact | Higher net income and better return on investment | Lower net income and reduced investment returns |
How to Prepare a Depreciation Schedule
Hire a licensed quantity surveyor
The ATO mandates that a qualified quantity surveyor assess and prepare the depreciation schedule to ensure accuracy and compliance.
Property inspection and assessment
The surveyor conducts a thorough inspection of the building, its assets, and any previous improvements to determine all depreciable items.
Report preparation and submission
The surveyor categorises assets under Division 40 and Division 43, compiling a comprehensive report that details the depreciation claims available for each financial year.
The cost of a depreciation report typically ranges from $600 to $800 and is tax-deductible. Given the potential savings of $5,000 to $15,000 annually, the return on investment is substantial.
ATO Guidelines and Eligibility
Eligibility requirements
- Properties constructed after 18 July 1985 are eligible for capital works deductions (Division 43)
- Only properties held for income-producing purposes qualify for depreciation claims
- Owner-occupied residences are excluded from depreciation benefits
How property age affects depreciation
- Newer properties: Offer higher depreciation deductions due to the value of new assets and recent construction
- Older or pre-owned properties: May have limitations, especially concerning plant and equipment deductions, due to the 2017 tax reforms restricting claims on second-hand assets
Key legislative updates
- Immediate write-off for small assets: The ATO allows investors to immediately write off depreciable items under a threshold of $1,000 in value
- Second-hand asset restrictions: Since 9 May 2017, depreciation on plant and equipment assets can only be claimed by the owner who incurred the expense, not subsequent owners (unless the asset was brand new when acquired)
- Short-term rental clarification: Properties rented out through platforms like Airbnb may still qualify for depreciation, but usage patterns will affect the claimable amount
Common Mistakes to Avoid
- Overlooking eligible assets and missing out on qualifying deductions
- Incorrectly categorising items under the wrong depreciation division
- Not updating the schedule after renovations or improvements
- Not hiring a professional quantity surveyor, leading to errors and non-compliance
- Claiming depreciation on an owner-occupied property
When to Update Your Schedule
- After major renovations or improvements: New additions may qualify for additional depreciation claims
- When tax legislation changes: Staying updated with ATO amendments ensures ongoing compliance
- After property acquisition or sale: New owners should obtain a fresh depreciation schedule
Key Takeaways
- A property depreciation schedule can generate between $5,000 and $15,000 in annual tax deductions for Australian investors.
- Depreciation falls under two ATO categories: Division 40 (plant and equipment) and Division 43 (capital works).
- Only properties held for income-producing purposes qualify. Owner-occupied homes are excluded.
- The 2017 tax reform restricts Division 40 claims on second-hand assets for subsequent property owners.
- The cost of a depreciation report ($600 to $800) is itself tax-deductible and pays for itself many times over.
- A licensed quantity surveyor must prepare the schedule to meet ATO requirements.
- Update the schedule after renovations, legislation changes, or when the property changes hands.
Frequently Asked Questions
QWhat is a property depreciation schedule?
A property depreciation schedule is a detailed report that outlines the tax-deductible depreciation available on a property's structure and assets over time. It is prepared by a licensed quantity surveyor and used to claim deductions on annual tax returns.
QWhy should property investors claim depreciation?
Depreciation reduces taxable income, which increases annual tax refunds and improves cash flow. For a $600,000 rental property, annual depreciation deductions can be approximately $12,000, which makes a significant difference to overall investment returns.
QHow much does a house depreciate per year in Australia?
Depreciation varies depending on the property's age, construction costs, and improvements. Annual deductions can range from $5,000 to $15,000. Newer properties generally offer higher deductions due to the greater value of recent construction and assets.
QCan you claim depreciation on a property you live in?
No. Only investment properties held for income-producing purposes qualify for depreciation deductions. Owner-occupied homes are excluded from these benefits under ATO rules.
QHow do tax changes affect depreciation claims?
Since the 2017 tax reforms, investors who purchase second-hand properties cannot claim depreciation on pre-owned plant and equipment assets (Division 40). However, capital works deductions (Division 43) remain unaffected and can still be claimed by subsequent owners.
QIs a depreciation schedule tax-deductible?
Yes. The cost of obtaining a depreciation report is fully tax-deductible. Given that the report typically costs $600 to $800 and can generate thousands in annual deductions, it offers a strong return on investment.
QCan older properties qualify for depreciation?
Yes, but with limitations. Older properties can still claim capital works deductions (Division 43) for the building structure if built after 18 July 1985. However, plant and equipment deductions (Division 40) on second-hand assets are restricted for subsequent owners under the 2017 reforms.
QWhat is the difference between capital works and plant depreciation?
Capital works deductions (Division 43) cover the building structure such as walls, floors, and roofing, depreciated at 2.5% per year over 40 years. Plant and equipment depreciation (Division 40) covers removable assets like carpets, appliances, and air conditioning units, with rates based on each asset's effective life.
QHow do I update my depreciation schedule?
Hire a quantity surveyor to reassess the property after renovations, property acquisition, or when tax law changes occur. The surveyor will update the schedule to reflect new assets or altered depreciation rates.
QDo short-term rental properties like Airbnb qualify for depreciation?
Yes, properties rented out through short-term rental platforms may still qualify for depreciation deductions. However, the ATO considers how the property is used and the proportion of time it is rented versus used personally. The claimable amount may be adjusted based on usage patterns.
References and Resources
- Australian Taxation Office - Rental property depreciation - Official ATO guidance on claiming depreciation
- Australian Taxation Office - Division 43 Capital Works - ATO guidelines for capital works deductions
- Australian Institute of Quantity Surveyors - Professional body for quantity surveyors in Australia
- Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 - 2017 legislative changes to depreciation rules
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Want to find out how much you could save with a property depreciation schedule? Owner Inspections connects you with licensed quantity surveyors who prepare ATO-compliant depreciation reports. Get a free quote or call 1300 471 805.