How Does Property Depreciation Work in Australia?

Why read this article

Understand how property depreciation works in Australia and how it can boost your investment returns through tax savings.

When most Australians think about property investment, they focus on rental income or the potential for capital growth. But one of the less visible advantages of investing in real estate is property depreciation in Australia — a powerful form of tax depreciation that allows investors to reduce taxable income and improve cash flow.

Depreciation is essentially recognition of the fact that buildings, fixtures and fittings wear out over time. The Australian Taxation Office (ATO) allows investors to claim this decline in value as a deduction, just as they would with interest payments or property management fees. These deductions do not require additional day-to-day spending, but they can help reduce taxable income and potentially improve cash flow.

 

Two Types of Property Depreciation

Property investors in Australia can generally claim depreciation in two main ways:

• Capital works deductions – for the structural parts of a building, including walls, roofs, brickwork and concrete. Residential properties built after 15 September 1987 generally qualify, with deductions claimed at 2.5% per year over 40 years*.
• Plant and equipment depreciation – for removable fixtures and fittings inside the property, such as carpets, blinds, appliances, hot water systems and air conditioners.

 

Together, these allowances can add up to significant tax deductions over time.

To see how this works in practice, imagine buying a brand-new investment property for $500,000. A quantity surveyor depreciation schedule — prepared by a professional qualified to calculate depreciation allowances — might determine that $200,000 of that value relates to the structure and $40,000 to plant and equipment. That means you could be eligible to claim around $9,000 per year in depreciation. For an investor earning $100,000 a year, with a marginal tax rate of 34.5% including the Medicare levy, that translates into tax savings of more than $3,000 each year*.

This is why depreciation is such an important part of the investment story. In many cases, depreciation can improve after-tax cash flow and reduce the out-of-pocket costs associated with holding an investment property. That difference may help investors hold property for longer and benefit from long-term capital growth.

Securing a depreciation schedule is a vital step. The ATO requires that only a qualified quantity surveyor can prepare this report, which outlines the deductions available each year. While there is a cost involved, many investors find the savings in the first year alone outweigh the fee, making it a worthwhile investment. Importantly, depreciation is one of the most valuable rental property deductions available to investors.

It is also important to note that not every property is eligible for the same claims. Properties built before 1987*, for example, generally do not qualify for capital works deductions unless major renovations have been undertaken. Since 2017, restrictions have applied to second-hand plant and equipment assets in residential properties, meaning only new assets are generally claimable. Because the rules can be complex, professional advice from a tax adviser or accountant is recommended.

In the end, understanding how property depreciation works in Australia is not just about ticking a box at tax time. It is about understanding the deductions available and ensuring you are making informed decisions about your investment property. By applying depreciation correctly, investors may improve cash flow and strengthen the long-term performance of their portfolio.

How Accrue Real Estate Helps

Accrue Real Estate, we understand that choosing the right investment property involves more than simply finding a property. Our team focuses on research-driven property selection, with a strong emphasis on new property opportunities where depreciation benefits may be available. We work alongside trusted industry professionals, including quantity surveyors, mortgage brokers, accountants and other specialists, helping clients understand important considerations such as depreciation schedules, rental property deductions and cash flow. Backed by years of experience and detailed market research, Accrue Real Estate helps investors make informed decisions with confidence and take a long-term approach to building a property portfolio.

Note on Calculations

The financial calculations provided in this article, including depreciation claims, tax savings and cash flow examples, are illustrative only and are based on standard assumptions available from the Australian Taxation Office (ATO) guidelines relating to Division 40 (Plant and Equipment) and Division 43 (Capital Works) (https://www.ato.gov.au/business/depreciation-and-capital-expenses-and-allowances/). Tax rate examples are based on the 2024–25 Australian resident individual income tax rates published by the ATO (https://www.ato.gov.au/rates/individual-income-tax-rates/). The reference to residential properties constructed after 15 September 1987 is derived from the ATO’s capital works guidance (https://www.ato.gov.au/forms-and-instructions/rental-properties-2024/residential-rental-property-assets/capital-works). Actual outcomes will vary depending on the property’s purchase price, construction date, asset type and the investor’s personal circumstances. Investors should obtain a depreciation schedule from a qualified quantity surveyor and seek professional tax advice before making decisions.