What is Depreciation and How Can It Benefit Property Investors?

What is Depreciation and How Can It Benefit Property Investors?

Depreciation is one of the most valuable yet often overlooked tools available to property investors. It allows you to claim a tax deduction for the gradual wear and tear of your property and its fittings—reducing your taxable income and boosting your cash flow.

While depreciation benefits vary depending on the age and condition of the property, understanding how it works can help you structure your investments more effectively and improve overall returns.

Here’s how depreciation works and how you can use it strategically as part of your investment approach.

What is Property Depreciation?

Depreciation refers to the decline in value of your property and its fixtures over time. The Australian Taxation Office (ATO) allows investors to claim this depreciation as a deduction on their tax return, helping to offset rental income.

There are two main types of depreciation investors can claim:

• Capital Works Deductions (Division 43): Covers the structural components of the building—such as walls, roof, and foundations. These can only be claimed if the property was built after 16 September 1987.

• Plant and Equipment Depreciation (Division 40): Applies to removable assets like carpets, appliances, hot water systems, and air conditioners. However, if the property is second-hand and purchased after 9 May 2017, these deductions are restricted unless the items are brand new.

How Does Depreciation Benefit Property Investors?

Depreciation offers real financial advantages that can help investors manage holding costs and improve cash flow. It’s especially valuable because it’s a non-cash deduction—meaning it reduces your tax without requiring additional spending.

Key benefits include:

• Reduces taxable income: Depreciation lowers your overall tax liability by offsetting rental income.

• Improves cash flow: Less tax means more income retained, which can help with mortgage repayments or reinvestment.

• Non-cash expense: Unlike maintenance or insurance, depreciation doesn’t require an out-of-pocket cost.

Can You Claim Depreciation on Established Properties?

Yes—but there are limitations, especially when it comes to second-hand properties. Investors purchasing older homes may still benefit from depreciation, but the amount depends on the property’s construction date and condition.

Here’s what to keep in mind:

• Capital works deductions can still be claimed if the property was built after 1987.

• Plant and equipment depreciation generally cannot be claimed for used items in second-hand properties purchased after 9 May 2017.

• New fixtures and renovations are eligible for depreciation, even in older homes.

Solution: A qualified quantity surveyor can prepare a tax depreciation schedule to help you identify and claim all allowable deductions.

How to Maximise Your Depreciation Benefits

A smart depreciation strategy can help you reduce tax and hold your investment more comfortably. Whether you own a new or established property, there are steps you can take to enhance your claim.

Here’s how to get the most out of it:

• Order a tax depreciation schedule: This is essential and should be prepared by a registered quantity surveyor. It outlines all claimable deductions across the life of the property.

• Consider new properties: Brand-new builds offer full depreciation benefits on both structure and fixtures, maximising deductions from day one.

• Renovate strategically: Updating kitchens, bathrooms, or appliances allows you to reset depreciation claims on those new items.

• Work with a specialist tax advisor: A property tax accountant can ensure your claims are compliant and optimised under ATO rules.

Bringing it all together

Depreciation is a powerful tool that can improve the cash flow of your investment property and reduce the impact of holding costs. While new properties provide the greatest benefit, even established properties can deliver solid tax savings when approached correctly. A well-prepared depreciation schedule and the right professional advice can make a significant difference to your after-tax returns.

Looking to maximise your depreciation strategy? Book your investment session with PropVest and let’s structure your portfolio for better cash flow and smarter tax outcomes.

Disclaimer: This article is for general information only and does not constitute financial or tax advice. You should seek advice from a qualified professional before making any property or investment decisions.