Depreciation on investment property: A complete guide for Australians

As an Australian investor, it's important to know how depreciation works on investment property to get the most out of your money. Depreciation lets you take tax deductions for the normal wear and tear that happens to your property and its assets over time. If you own a new apartment, an established house, or a commercial space, knowing what you may claim and how it works is a smart investment strategy that can make a major difference in how much money you make after taxes.

In this guide, we’ll break down the types of depreciation, how it affects your tax return, the rules for new and old properties, and steps to create a professional depreciation schedule that helps you make the most out of your investment.

Key takeaways:

• Depreciation is a tax deduction that can help offset rental income and improve your overall cash flow.
• Factors like property type, finish quality, and location affects how much you can claim in depreciation.
• A depreciation schedule helps you maximise tax deductions, but only a qualified Quantity Surveyor can prepare a valid depreciation schedule.
• Since May 2017, investors can no longer claim depreciation on second-hand plant and equipment in residential properties purchased after that date.

What is depreciation on an investment property?

Depreciation on an investment property is a tax deduction for the decline in value of the building and its assets over time. The Australian Taxation Office (ATO) allows property investors to claim depreciation on both the structure (referred to as capital works) and removable items like appliances and carpets (referred to as plant and equipment).

These deductions can lower your taxable income and improve your total cash flow by lowering your rental income. It's important to remember that only income-producing properties can be claimed for depreciation. Owner-occupied properties don't, because they don't generate income.

Types of property depreciation

For Australian property investors, depreciation typically falls into two categories:

• Capital works deductions (Division 43): Refers to the structural decline of the building itself, claimable at 2.5% per year for up to 40 years if the property meets the rules, i.e. for construction commenced after 15 September 1987.
• Plant and equipment deductions (Division 40): The decline in value of removable assets like appliances, carpets, blinds, and air conditioning units.

How depreciation affects your tax return

Depreciation reduces the taxable income generated from your investment property by offsetting rental income with allowable deductions. Because it’s a non-cash expense, claiming depreciation means you can lower your tax bill without any additional cost. For example, a $5,000 depreciation deduction could save around $1,500 in tax if your marginal rate is 30%.

To claim depreciation correctly, you’ll need a depreciation schedule prepared by a qualified quantity surveyor that outlines all eligible items and their values. However, depreciation reduces the property’s cost base for capital gains tax purposes when you sell. Despite that, the annual tax savings often outweigh this future adjustment.

Depreciation rules for new vs old investment properties

Depreciation rules in Australia differ significantly between new and second-hand investment properties. For brand-new properties, investors can claim both capital works deductions (Division 43), typically at 2.5% per year for 40 years on the building’s construction cost, and plant and equipment deductions (Division 40) for new assets such as carpets, air-conditioners, and appliances.

This makes new builds more attractive for tax purposes because the total deductible amount is usually higher. Older or previously owned residential properties purchased after 9 May 2017 have stricter rules. While owners can still claim capital works deductions (if the building was constructed after 15 September 1987), they cannot claim depreciation on second-hand plant and equipment that was already in use. However, any new assets installed after purchase remain deductible.

New investment properties offer greater depreciation benefits, while older properties still provide valuable building deductions but fewer opportunities for asset write-offs.

Residential vs commercial property depreciation

The rules and benefits differ significantly between residential and commercial properties when it comes to property depreciation. Below, we outline key differences in claimable items for residential vs commercial property depreciation.

	Residential Property	Commercial Property
Capital Works (minimum construction date)	Property must have construction commenced after 15 Sept 1987 for full allowance.	Construction must have commenced after 20 July 1982 for building allowance eligibility.
Claimable Plant & Equipment	For second-hand residential properties exchanging after 9 May 2017: existing plant and equipment assets cannot be claimed. Only newly installed assets can be claimed.	Existing and second-hand plant and equipment assets can be claimed. There is a broader eligibility for assets, including tenant-fit-outs.
Owner-occupier usage	If the owner lives in the residential property (not income-producing), depreciation generally cannot be claimed.	Owner-occupier use of commercial property can still allow depreciation claims, especially if used by a business.
Eligible assets / fit-outs	Limited to removable assets and building structure for income-producing rental properties. More restricted list of assets.	Much wider range—includes tenant fit-outs (shelving, desks, partitions), heavier usage assets, and scrapping rules on asset disposal.
Depreciation intensity / wear and tear	Generally lower intensity due to residential usage. Asset wear may be slower.	Higher potential wear and tear (especially in retail, industrial) means faster depreciation for certain assets.

How location and property type affect depreciation

Not all investment properties depreciate at the same rate. In Australia, factors like property type, finish quality, and location significantly impacts how much you can claim in depreciation. Understanding these differences helps investors identify properties with stronger long-term tax benefits and cash-flow potential.

• Apartments vs Houses. Apartments have higher depreciation deductions than houses because they include more plant and equipment items (lifts, air-conditioning systems, and common-area assets) and less non-depreciable land. Houses, with larger land components and fewer shared assets, typically yield lower total deductions.
• High-end finishes vs Standard inclusions. Properties with premium fixtures and finishes can claim more depreciation than those with standard inclusions. The more sophisticated and costly the assets, the greater the available tax deductions.
• Regional vs Metro properties. Metro properties often attract higher depreciation due to more complex builds, modern materials, and shared facilities. Regional properties usually have lower construction costs with simpler finishes, and tend to generate smaller claims.

Depreciation schedules explained

A depreciation schedule is a report that details all the deductible building and asset costs of an investment property, showing how much you can claim each year. It covers both capital works and plant and equipment, helping investors maximise tax deductions in line with ATO guidelines.

Only a qualified Quantity Surveyor can prepare a valid depreciation schedule, as they’re licensed to estimate construction and asset values. Accountants use this report to apply the deductions at tax time.

A depreciation schedule usually lasts up to 40 years, outlining construction costs, asset values, and yearly deductions. Once prepared, it can be reused annually unless major renovations or upgrades occur. It is a simple and long-term tool that can be used to boost property tax savings.

Benefits of claiming depreciation

Claiming depreciation on an investment property is one of the most effective ways to boost your post-tax returns in Australia. Here are some notable benefits:

• Reduced taxable income. Depreciation lowers your taxable rental income by offsetting it with non-cash deductions. This means you pay less tax each year while keeping your rental earnings intact.
• Improved property cash flow. Because depreciation doesn’t require any out-of-pocket spending, it increases your cash flow. You retain more income each month, making it easier to cover loan repayments, maintenance, or reinvest in other properties.
• Increased return on investment (ROI). By maximising deductions and improving cash flow, depreciation enhances your overall investment returns. Combined with rental income and capital growth, these tax savings can improve long-term property performance.

Limitations and considerations

While property depreciation can deliver significant tax savings, there are some limitations and costs you should be privy to before claiming. Recent ATO rule changes have affected what can be claimed. Since May 2017, investors can no longer claim depreciation on second-hand plant and equipment in residential properties purchased after that date. Only new assets or those in brand-new or substantially renovated properties remain eligible for full deductions (ATO).

There’s also the cost of preparing a depreciation schedule, which is usually handled by a qualified Quantity Surveyor. Fees typically range from $600 to $800, depending on the property’s size and location. While a one-off expense, it is tax-deductible and often pays for itself through increased annual deductions.

Additionally, not every property has strong depreciation returns. Older homes, those with minimal renovations, or properties nearing the end of their 40-year building life may have limited claims available.

Case studies of depreciation benefits

These real-life examples highlight how property depreciation can make a major difference to an investor’s cash flow and tax savings. By claiming deductions for building structure and assets, Australian investors can turn negatively geared properties into positive ones.

Example: New apartment investor

In this example, an investor purchased a brand-new house for approximately A$730,000. A depreciation schedule uncovered $15,500 in deductions in the first full financial year. This deduction helped shift the property’s cash flow from a loss of about $75 per week to a positive $35 per week, just by claiming depreciation.

Example: Older house with renovations

Another case involved an older three-bedroom house bought at A$500,000. After applying a depreciation claim of around $6,000 in the first year, the weekly cash flow improved by approximately $42 per week, lowering the annual out-of-pocket cost by more than $2,200.

Finally, we have a third scenario featuring a second-hand house built in 2014 and purchased for A$800,000. The investor claimed $7,507 in the first year, saving roughly $2,778 in tax. Over time, the total depreciation claim could reach more than $227,000.

Conclusion

Claiming depreciation on your investment property is one of the most effective ways to improve after-tax returns. With the right strategy and a professional depreciation schedule, investors can reduce taxable income, increase cash flow, and enhance long-term property performance.

Since depreciation rules can change and every property is unique, it’s best to get tailored advice from a qualified Quantity Surveyor and your accountant to ensure you’re claiming everything you’re entitled to under current ATO guidelines.

If you’re looking to invest in a reliable property, explore Frasers Property and discover developments designed for lasting value and depreciation benefits.

Contact us today to learn more about our latest projects and how you can start building your investment property portfolio.

Disclaimer: All information set out in this article and any FAQs, including but not limited to estimated calculations, statistics, opinions, and external links, is provided as a general guide only as at the date of publication and does not constitute advice. Actual figures and the suitability of the information may vary depending on individual circumstances, lender terms, property location, and market conditions. Purchasers are responsible for seeking independent professional advice or making their own enquiries in relation to any investment decisions. No representations or warranties are made as to the accuracy, currency, or completeness of any estimates or their contents.
Date of publication: November 2025.