Investment Property Depreciation

Property depreciation is a valuable tax deduction for investment property owners. It lets you claim the gradual wear and tear of your property’s building structure in terms of construction costs and capital improvements (like extensions or renovations). It also covers eligible plant and equipment items such as carpets, curtains, dishwashers, furniture, and fittings that you purchase new. While land itself isn’t depreciable, claiming depreciation helps reduce your taxable income and improves your cash flow as a property investor.

Take the time to learn what can and cannot be depreciated and you can avoid paying too much tax!

How Does Depreciation Work?

Depreciation recognises that investment properties and the assets inside them lose value over time. The Australian Taxation Office (ATO) allows you to claim this decline in value as a tax deduction.

There are two main categories of depreciation that property investors can access:

• Capital works deductions: These cover the structure of the building itself, such as walls, roofs, floors, and fixed items like built-in wardrobes or cabinetry. Typically, you can claim 2.5% per year for 40 years from the date of construction, based on the building’s construction cost.
• Plant and equipment depreciation: This applies to removable or mechanical items within the property, such as carpets, ovens, blinds, or air conditioners. Each item has an “effective life” set by the ATO, which determines how long you can claim depreciation on it.

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Methods Of Calculating Depreciation

When it comes to property investment, depreciation is one of the most valuable yet often overlooked deductions. Many investors miss out on significant tax savings simply because they don’t fully understand how depreciation works.

Under Australian tax law, property owners can claim deductions for the decline in value of furniture, plant and equipment, and eligible building works used in a rental property. By maximising these claims, you can reduce your taxable income and improve cash flow.

The ATO allows two methods for calculating depreciation:

1. Diminishing Value Method

• Provides larger deductions in the earlier years and smaller ones later.
• Reflects the reality that most assets lose value faster when they’re new.
• Can improve cash flow in the short term.

2. Prime Cost (Straight-Line) Method

• Spreads deductions evenly over the asset’s effective life.
• Deduction amount remains the same each year.
• Offers predictability in long-term cash flow planning.

Choosing the right method can make a big difference to your tax position. A qualified accountant or quantity surveyor can help determine which approach best suits your investment strategy.

Tip: Take the time to understand what items can and cannot be depreciated. This will ensure you maximise your claims and avoid paying more tax than necessary.

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Depreciation for furniture

The depreciation claim for furniture is the simplest and hardest to miss. If a property is furnished, the the ATO allows a landlord to claim the cost of the furnishings as a tax deduction over a number of years.

These maybe for furnishings installed at the time of purchase or items bought during the rental period. Typically an item of furniture can be claimed over 5-10 years as stipulated by the tax office.

Depreciation for the building

The depreciation claim for plant, equipment and buildings is often overlooked. You are normally allowed to claim a small percentage of the cost of the building and fixed structures on the property over time.

Usually, the rate is 2.5% from the time the property is built, the total claim is limited to the cost of construction and you need to get a quantity surveyor to do the figures for you.

That might sound like too much of a hassle for a small result, but think of this. If you bought a house today for $600,000 and that house cost $250,000 to build in 2000, then you could potentially claim an extra $6,250 against the rental income every year until 2040.

What if the house were instead an off-the-plan, newly built apartment? If it cost you $600,000 today with total building costs of $400,000 – then there are some big claims you could make of $10,000 per year.

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Speak to an accountant

This information is general and has been provided by Lucentor Pty Ltd who are accountants that specialise in tax for property investors.

We recommend investors obtain financial advice specific to their situation before making any investment or decision regarding their finances.