Depreciation Schedules for Investment Properties

How Residential Tax Depreciation Works in Australia - A Simple Guide for Property Investors

Many property investors know that depreciation can reduce their taxable income, but few understand exactly how it works or how much they may be able to claim.

This guide explains residential tax depreciation in simple terms and outlines the situations where investors may be able to claim significant deductions.

What is Property Depreciation?

Property depreciation allows investors to claim tax deductions for the wear and tear of a rental property and its assets over time.

In Australia, the Australian Taxation Office (ATO) allows two main types of depreciation:

Capital Works (Division 43)
This relates to the structure of the building and fixed construction elements such as walls, roofs, doors and windows.

Plant and Equipment (Division 40)
This covers removable assets inside the property such as appliances, carpets, air-conditioning units, hot water systems and blinds.

These deductions can significantly reduce an investor’s taxable income.

Who Can Claim Residential Depreciation?

Depreciation is generally available to owners of income-producing residential properties.

This includes:

• Houses

• Units and apartments

• Townhouses

• Duplexes

• Some holiday rentals

The property must be used to generate income, typically by being rented to tenants.

How Much Can Investors Claim?

The amount varies depending on:

• Age of the building

• Construction cost

• Renovations or improvements

• Value of plant and equipment assets

Newer properties usually generate higher depreciation deductions because more of the assets are still within their effective life.

However, even older properties can still produce deductions, particularly where renovations have occurred.

Why Investors Use a Quantity Surveyor

The ATO recognises Quantity Surveyors as one of the professionals qualified to estimate construction costs for depreciation purposes.

A depreciation schedule prepared by a Quantity Surveyor outlines:

• All depreciable assets in the property

• Construction costs where original records are unavailable

• Annual deductions for up to 40 years

Most investors provide the schedule to their accountant each year when completing their tax return.

Why doesn’t my Accountant prepare the Depreciation Schedule?

Accountants typically use the depreciation schedule when preparing your annual tax return, but the schedule itself is usually prepared by a Quantity Surveyor.

This is because the schedule requires an estimate of the building’s construction cost and the identification of depreciable assets, which is a specialist skill related to construction cost estimation.

The Australian Taxation Office recognises Quantity Surveyors as one of the professionals qualified to estimate construction costs for depreciation purposes when original construction records are not available.

In practice, the Quantity Surveyor prepares the depreciation schedule and the accountant then applies those deductions when completing the investor’s tax return.

Why Many Investors Miss Depreciation

Many investors never claim depreciation simply because they are unaware it exists.

Others assume their property is too old or that the deductions would be minimal.

In reality, many properties still contain significant depreciable components.

This is why many investors request a depreciation estimate before ordering a full schedule.

How Depreciation Supports Negative Gearing

Depreciation deductions are often one of the key drivers of Negative Gearing.

By increasing the deductible expenses associated with the property, Depreciation can reduce taxable income and improve the after-tax cash flow of the investment.

This is one of the reasons Depreciation is widely used by property investors across Australia.

When Should a Depreciation Schedule Be Prepared?

A Depreciation Schedule is commonly prepared when an investor purchases a property or when a property first becomes available for rent.

However, many investors only become aware of depreciation deductions years after purchasing their property. In these situations, it is still usually possible to prepare a schedule and begin claiming deductions going forward.

And if deductions were missed in previous years, an investor’s accountant may also be able to amend prior tax returns, depending on the circumstances.

A schedule may also be prepared when:

• A property is purchased as an investment

• A previously owner-occupied property becomes a rental

• Renovations or improvements have been completed

• Assets are replaced or removed as part of refurbishment works

Preparing a depreciation schedule helps ensure investors understand the deductions available and avoid missing potential claims.

Not Sure if Depreciation Applies to Your Property?

If you're unsure whether depreciation deductions may be available for your investment property, our team can help.

We’re happy to review the property with you, explain how depreciation works, and discuss any unique situations that may affect your property. This might include things like renovations, ownership structures, or the date the property first became available for rent.

Once we understand the property, we can also provide a free depreciation estimate so you have a clear idea of the potential deductions before deciding whether to proceed with a full schedule.

To request a free estimate or discuss your property, simply contact our team and provide the property address.