In short: Depreciation is a deduction you claim without spending cash. Capital works on eligible residential construction completed after 15 September 1987 are generally deductible at 2.5% a year over 40 years. Since the 2017 changes, second-hand plant and equipment in a previously used residential property is generally not deductible for most investors, while genuinely new property still is. A quantity surveyor's schedule is the document that unlocks both, and its cost is itself deductible.
Most rental deductions cost you money before they save you tax. Depreciation does not: the building wears out whether or not you write a cheque. It is why a new house in Donnybrook and a 1995 house in Reservoir at the same price produce very different after-tax cashflow.
The two kinds of depreciation
Capital works (Division 43)
This is the structure: the concrete, framing, brickwork, roof, tiling, built-in cupboards, driveway, retaining walls and fencing. For eligible residential construction completed after 15 September 1987, the deduction is generally 2.5% of the original construction cost each year for 40 years from completion. Confirm the current rules and rates at ato.gov.au, because different rates and dates apply to some building types and to structural improvements.
Two things follow. The deduction is based on the construction cost, not what you paid and not the land. And the 40 years runs from completion, not from when you bought: a house completed in 1995 has capital works available until about 2035, whoever owns it.
Plant and equipment (Division 40)
This is everything removable and mechanical: oven, dishwasher, cooktop, rangehood, air conditioning, hot water system, carpets, blinds, light fittings, smoke alarms, solar panels, garage door motor. Each has an effective life set by the ATO and is written off over that life, on either the diminishing value or prime cost method.
The 2017 change, and why new property is treated differently
For most individual investors, second-hand plant and equipment in a previously used residential property is generally not deductible. Broadly, the restriction applies to assets in residential rental properties acquired after 9 May 2017, with limited exceptions including assets you bought and installed new. Different treatment can apply to corporate tax entities, some trusts and to properties used in a business, so confirm your position with your accountant against current ATO guidance.
The practical effect for an ordinary investor buying an established house:
| Brand new property | Established property bought today | |
|---|---|---|
| Capital works at 2.5% | Yes, if built after 15 September 1987 | Yes, if built after 15 September 1987 and within the 40 years |
| Existing plant and equipment | Yes, all of it, as first owner | Generally no |
| New items you install yourself | Yes | Yes |
| Typical first-year total | Often $10,000 to $15,000 on a new house | Often $2,000 to $4,000 |
Undeducted second-hand plant and equipment is not simply lost; it is generally recognised in the capital gains calculation instead.
Worked example: new versus established at the same price
Two $650,000 investment purchases, both rented at $520 a week. The investor's marginal rate is 30% plus the 2% Medicare levy, so 32%.
Property A: a new house in Donnybrook
- Land $300,000, construction cost $350,000
- Capital works: $350,000 × 2.5% = $8,750 a year
- New plant and equipment (appliances, carpets, blinds, air conditioning, hot water) of about $25,000, giving roughly $6,000 in year one on the diminishing value method
- First-year depreciation: about $14,750
- Tax value at 32%: $14,750 × 0.32 = about $4,720 a year, or $91 a week, with no cash leaving your pocket
Property B: a 1995 house in Reservoir
- Original construction cost, assessed by a quantity surveyor in 1995 dollars: about $120,000
- Capital works: $120,000 × 2.5% = $3,000 a year, running until roughly 2035
- Second-hand plant and equipment: generally not deductible
- New dishwasher and blinds installed after settlement, $4,000: a small additional deduction
- First-year depreciation: about $3,000 plus a little
- Tax value at 32%: about $960 a year, or $18 a week
The difference is about $3,760 a year in tax, on identical prices and identical rent, or close to $38,000 over ten years. That does not make new property automatically better, because you pay a builder's margin and the land content is usually lower, but it belongs in the comparison. Model both in the investment property cashflow calculator and read house and land versus established.
The quantity surveyor's depreciation schedule
You cannot claim capital works on an estimate you made up, and your accountant is not qualified to estimate construction costs. A quantity surveyor is one of the professions recognised for the purpose. They inspect the property, identify every depreciable item, estimate the original construction cost where records do not exist, and produce a 40-year schedule in both the diminishing value and prime cost methods.
- Cost: typically $600 to $800 for a residential property, and the fee is itself deductible.
- It is a one-off. The schedule lasts your whole ownership. Your accountant draws from it every year.
- It can be backdated. If you have owned the property for years without one, amended returns are usually possible within the standard amendment period.
- Get it after settlement but before the first tax return, ideally before a tenant moves in.
If the schedule would show less deduction than the fee saves you, a reputable firm will say so before charging. On any post-1987 property it almost always pays for itself in year one.
Where depreciation fits with everything else
| Expense | Treatment |
|---|---|
| Loan interest | Immediately deductible for the income-producing portion |
| Council rates, water, insurance, agent fees | Immediately deductible |
| Repairs: fixing what was already broken during your ownership | Immediately deductible |
| Improvements: a new kitchen, an extension, a deck | Capital works at 2.5% a year |
| Appliances, carpets, blinds you buy new | Depreciated over their effective life |
| Items costing $300 or less | Generally an immediate deduction |
| Quantity surveyor's fee, accountant's fee | Immediately deductible |
| Stamp duty and purchase legal costs | Not deductible; they go into the cost base for capital gains tax |
The repairs-versus-improvements line is where investors most often get corrected. Replacing three broken roof tiles is a repair. Replacing the whole roof is capital works. Fixing damage that already existed when you bought is generally treated as capital, because you bought it in that condition.
The capital gains tax catch
Capital works deductions you have claimed generally reduce your cost base when you sell. If you claim $8,750 a year for ten years, that is $87,500 off the cost base, which increases the taxable gain by the same amount.
That is not a reason to skip it. You claim now at your marginal rate and give it back later on a gain usually halved by the 50% discount if you held for more than 12 months. A deduction worth 32 cents in the dollar today, repaid at an effective 16 cents in fifteen years, is a good trade. But it means the headline figure overstates the lifetime benefit. Read capital gains tax on property and use the capital gains tax calculator.
Practical checklist
- Order the depreciation schedule in the first month after settlement.
- Keep every invoice for anything you install, with the date and the amount.
- Photograph the property at handover, so new items are evidenced as new.
- Consider a PAYG withholding variation so the benefit arrives in each pay rather than at tax time.
- Review the schedule after any renovation, because new capital works and new plant start their own clocks.
Depreciation is one lever among several. It works alongside interest deductibility, covered in negative gearing explained and positive versus negative gearing. Lenders assess rent rather than tax benefits: see rental income and how lenders shade it and investment property loans.
Frequently asked questions
Can I claim depreciation on an older investment property?
Often yes, on the structure. Capital works at 2.5% a year is generally available on eligible residential construction completed after 15 September 1987, for 40 years from completion, regardless of how many times the property has changed hands. Second-hand plant and equipment in a previously used residential property is generally not deductible for most individual investors since the 2017 changes.
What is a depreciation schedule and do I need one?
It is a report from a quantity surveyor setting out every depreciable item and the original construction cost across 40 years. You need one because neither you nor your accountant can validly estimate construction costs. It costs around $600 to $800, the fee is deductible, and it lasts your whole ownership.
Is depreciation worth it on a cheap established house?
Usually yes, if it was built after 1987. Even $2,500 a year of capital works is worth about $800 in tax at a 32% marginal rate, against a one-off deductible fee of about $700. If it was built before 1987 with no substantial renovation, the answer may be no, and a good quantity surveyor will say so.
Does claiming depreciation increase my capital gains tax?
Capital works deductions generally reduce your cost base, so they increase the taxable gain when you sell. It is still worth claiming: the deduction is worth your full marginal rate today, and the extra gain is usually halved by the 50% discount if you hold for more than 12 months. Factor it into projections rather than ignoring it.
What is the difference between a repair and an improvement?
A repair restores something to its former condition during your ownership and is immediately deductible. An improvement makes the property better than it was and is claimed as capital works at 2.5% a year. Fixing damage that existed when you bought is generally capital, because the price reflected the condition.
Talk to GNT Finance
Depreciation is your accountant's territory, but it changes the cashflow we model when structuring your loan, and it often decides whether a new build or an established house is the better buy. Gorakh Timilsina will run both scenarios before you commit. There is no cost to you for our home-loan service in most cases.
Book a free consultation or call 0426 403 703.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.