Understanding Rental Property Depreciation in Australia

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Understanding Rental Property Depreciation in Australia

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Depreciation on rental property is one of the most valuable but underused deductions available to investors in Australia. By correctly claiming depreciation, you reduce your taxable income and improve cash flow. The Australian Taxation Office (ATO) allows owners of income-producing properties to claim deductions for the decline in value of assets and structures over time.

This guide explains how depreciation works, how to calculate it, what you need to stay compliant, and the benefits for property investors. It also answers the most common search questions such as how much depreciation you can claim, whether you need a depreciation schedule, and if you need to pay it back when selling.

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What Is Depreciation on Rental Property?

Depreciation is the reduction in value of an asset over time due to wear and tear, ageing, or obsolescence. For rental property, depreciation applies to two main areas:

• Capital Works (Division 43): The building structure, including walls, roof, doors, windows, and permanent fixtures such as tiles and concrete driveways.
• Plant and equipment (Division 40): Removable or mechanical assets within the property such as carpets, blinds, hot water systems, ovens, air conditioners, and furniture in furnished properties.

The ATO allows property owners to claim deductions for these declines in value each year. These deductions reduce taxable income, meaning less tax payable.

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Why Depreciation Matters for Property Investors

For property investors, maximising deductions is critical to increasing after-tax returns. Depreciation is a non-cash deduction, meaning you do not need to spend additional money to claim it. The expense is based on the property’s existing value, and it offsets your rental income for tax purposes.

Benefits include:

• Lower taxable income and reduced tax payable
• Improved cash flow
• Increased return on investment
• Legitimate deductions approved by the ATO

By not claiming depreciation, you risk missing thousands of dollars in deductions each year.

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ATO Rules on Rental Property Depreciation

The ATO provides detailed guidance on how to claim depreciation. Key rules include:

• Only income-producing properties are eligible. If the property is owner-occupied, depreciation cannot be claimed.
• Division 43 (capital works) deductions apply to properties built after 16 September 1987. For renovations or extensions, deductions may also apply from that date.
• Division 40 (plant and equipment) can only be claimed for new assets purchased by you, not second-hand items in properties acquired after 9 May 2017.
• Deductions are based on the effective life of each asset as determined by the ATO.

Staying within ATO rules ensures compliance and avoids issues during audits.

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Effective Life of Assets Explained

The useful life of an asset is the period the ATO determines the item can be used for income-producing purposes. For example:

• Carpet: 10 years
• Blinds: 10 years
• Hot water system: 12 years
• Ovens: 12 years
• Furniture: 15 years

These effective lives are updated regularly. You can use either the ATO’s effective life tables or a self-assessment if you have evidence. Depreciation is calculated across this period using approved methods.

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Methods of Calculating Depreciation

There are two main methods to calculate depreciation:

1. Prime cost method (straight line): Deducts the same amount each year over the useful life of the asset.
2. Diminishing value method: Deducts a higher amount in the early years and smaller amounts later.

Example:

• A $3,000 hot water system with a 12-year effective life.
• Prime cost: $250 deduction per year.
• Diminishing value: Higher in early years, lower in later years.

Investors often prefer diminishing value as it delivers greater deductions upfront, but the choice depends on your tax position.

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The Role of a Depreciation Schedule

A depreciation schedule is a report prepared by a qualified quantity surveyor. It lists all assets on the property, their value, effective life, and annual deductions.

Key points:

• Required to claim maximum depreciation.
• Provides ATO-compliant evidence.
• Covers both Division 40 and Division 43.
• Usually valid for 40 years.

Without a depreciation schedule, you risk underclaiming deductions or failing to meet ATO standards.

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How Much Depreciation Can You Claim?

The amount you can claim depends on:

• The property’s age and construction date
• The cost of construction or renovations
• The types of assets installed
• Whether you purchased the property before or after May 2017

Newer properties and recently renovated properties usually offer the highest deductions. It is common for investors to claim between $5,000 and $15,000 in the first year alone, depending on circumstances.

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How to Calculate Depreciation on a Rental Property

Step-by-step process:

1. Identify eligible assets and building works.
2. Determine construction costs or asset value.
3. Apply effective life periods using ATO tables.
4. Choose a calculation method (prime cost or diminishing value).
5. Prepare a depreciation schedule.
6. Claim deductions annually on your tax return.

Example:

• Renovated property with $100,000 capital works.
• Division 43 rate: 2.5% per year.
• Deduction: $2,500 annually for 40 years.

Adding plant and equipment items increases total deductions.

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Depreciation for Renovations and Improvements

If you renovate your rental property, you may claim depreciation on the new work and assets. Examples:

• Adding a new bathroom
• Installing air conditioning
• Replacing kitchen appliances
• Constructing a new deck

The cost of demolishing or removing old assets is not deductible, but new work is eligible if the property is income-producing.

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Claiming Depreciation with the ATO

When lodging your tax return, depreciation is claimed as part of your rental property deductions. You must:

• Keep records of construction, improvements, and purchases
• Use an ATO-compliant depreciation schedule
• Ensure only income-producing periods are claimed
• Retain receipts and supporting evidence

The ATO may request evidence, so accurate records are essential.

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Do You Have to Pay Back Depreciation?

When you sell your rental property, depreciation claimed on the capital works reduces the cost base for capital gains tax (CGT). This increases the taxable capital gain.

For example:

• Property purchased for $500,000, later sold for $700,000.
• You claimed $20,000 in capital works depreciation.
• Adjusted cost base becomes $480,000.
• Capital gain = $220,000 instead of $200,000.

Plant and equipment deductions do not affect CGT in the same way. It is important to plan for this when considering long-term strategies.

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Common Mistakes with Rental Property Depreciation

Investors often lose money by making avoidable errors. Common mistakes include:

• Not getting a depreciation schedule
• Assuming older properties have no deductions
• Claiming ineligible second-hand assets
• Forgetting to update schedules after renovations
• Miscalculating effective life periods
• Failing to keep adequate records

Working with a professional ensures compliance and maximised deductions.

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Frequently Asked Questions

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1. What are the benefits of a rental property depreciation calculator?
The calculator gives an estimate of potential deductions. It helps investors see the impact on cash flow before committing to a property purchase.

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2. Do you need a depreciation schedule for a rental property?
Yes. The ATO accepts reports prepared by qualified quantity surveyors. A depreciation schedule ensures you claim every eligible deduction.

3. How much depreciation can you claim on an investment property?
It depends on the age of the property, construction costs, and assets. New builds often provide the highest deductions, sometimes exceeding $10,000 annually.

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4. Do you have to pay back depreciation?
For capital works, yes, through CGT adjustments. For plant and equipment, no.

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5. How do you calculate depreciation on a rental property?
By applying effective life rates using either prime cost or diminishing value methods, supported by a depreciation schedule.

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6. Does the ATO provide effective life tables?
Yes. The following tables outline the expected lifespan of different assets used in rental properties.

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7. Is house depreciation different from apartment depreciation?
The principles are the same. The main difference is in construction costs, fixtures, and common area deductions for apartments.

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Case Studies

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New Build Investment

A new townhouse purchased for $600,000. Construction costs $250,000 with modern appliances.

• Capital works deduction: $6,250 annually.
• Plant and equipment: $4,500 annually.
• Total: $10,750 annual deduction.

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Renovated Property

Older home renovated for $120,000.

• Capital works deduction: $3,000 annually.
• Plant and equipment: $2,000 annually.
• Total: $5,000 annual deduction.

These case studies highlight how depreciation can create significant tax savings.

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The Role of Accountants in Maximising Depreciation

Accountants play a key role in ensuring depreciation is claimed correctly. Services include:

• Assessing eligibility
• Referring clients to quantity surveyors
• Integrating depreciation into annual tax returns
• Advising on CGT implications
• Providing long-term planning for property portfolios

At Trinity Accounting Practice, we guide clients through every step, from ordering depreciation schedules to lodging compliant returns.

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Depreciation and Negative Gearing

Depreciation increases the effectiveness of negative gearing. By boosting deductions, investors can offset rental income against other taxable income, lowering their overall liability. This is a strategic tool for high-income earners seeking to reduce their tax burden while building property wealth.

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Long-Term Tax Planning Considerations

When considering depreciation, investors must also plan for:

• Future renovations and upgrades
• Capital gains tax on sale
• Changes to ATO legislation
• Impact on loan structuring and cash flow

A strategic approach balances short-term deductions with long-term gains.

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How Trinity Accounting Practice Helps

Trinity Accounting Practice supports property investors across Australia with tax and accounting services tailored to rental property. We:

• Prepare and review depreciation claims
• Connect clients with trusted quantity surveyors
• Provide tax planning strategies
• Manage compliance with ATO rules
• Offer guidance on CGT and record-keeping

With more than 22 years of experience, we ensure investors receive every deduction they are entitled to while staying fully compliant.

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Final Thoughts

Depreciation is one of the most powerful tools available to property investors in Australia. By understanding ATO rules, using depreciation schedules, and working with professional accountants, you maximise your returns and strengthen your portfolio.

For expert help with your property investments, contact Trinity Accounting Practice today.

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☎️ 02 9543 6804
📍 159 Stoney Creek Road Beverly Hills NSW 2209
🌐 www.trinitygroup.com.au
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