Investment Property Depreciation: The important things to know

If you own or are interested in owning a rental property, you're probably aware there are a bunch of related expenses you can claim as tax deductions - interest on your investment home loan, for example.

Another hefty deduction is depreciation.

You might be able to claim depreciation on the structure of your investment property, as well as fixtures and fittings.

Understanding depreciation and claiming all that you're entitled to could save you thousands of dollars when tax time rolls around each year.

Depreciation on investment properties

As the structure of your investment property, along with it's fixtures and fittings, depreciates, you can often deduct this 'loss' from your taxable income each year.

Depreciation refers to something that declines in value over its working life. If you've ever bought and sold a car, you're probably familiar with this phenomeon.

In Australia, when you use a depreciating asset to produce income, you can make an annual tax deduction for it's declining value.

For example, if you buy a company car to help you run your business, you generally can't claim the cost as an instant tax write off. Instead, you claim it over time as the value of the vehicle depreciates. You'll presumably be using the car to generate income for several years, after all, so it makes sense that the expense is also spread over time. At least, that's how the ATO sees it.

The same principle applies to your investment property. There are two main categories that you might be able to make a deduction for depreciation each year that the property is tenanted or 'genuinely available' to rent:

Capital works deductions

Property investors can claim 'capital works deductions' for depreciation on the structure of the property itself.

That means that the declining value of renovations you do, as well that of any repairs, can be claimed as a capital works deduction over time. Capital works deductions are generally claimed over 40 years from the date construction finished, so 2.5% of the cost each year.

If the property you're buying or own was built after 17 July 1985, you could also claim a deduction for the building costs, even if you're buying as is. That doesn't mean you can simply claim the whole purchase price of the property - just the cost of constructing it.

Depreciating assets

You can also claim depreciation on 'plant' assets that aren't part of the structure of the building. A dishwasher, ceiling fans, and air-conditioning units are just a few examples of plant assets.

The ATO has a guide for the 'effective life' of different items. A dishwasher, for example, has an effective life of 10 years, so you can claim depreciation over the decade following the purchase.

Since 2017, you can only claim depreciation on plant items that you purchased new and that haven't been used before.

If the asset cost you less than $300, you can claim it as an instant write off, but anything more expensive needs to be claimed over time.

How to claim depreciation on an investment property

Calculating depreciation on capital works

Capital works deductions include the cost of constructing the property (providing it was completed after 1985), as well as any expenses you incur making renovations, repairs or other improvements. There are some exceptions - land isn't considered a depreciating asset, so you can't claim the cost of landscaping or gardening, for instance.

For construction costs that you incurred, you would claim 2.5% each year for 40 years, providing the property is rented or genuinely available for rent.

If you bought the property as is, you'll need to work out what the construction costs you can claim were at the time you bought it.

For example, say you buy a property in 2024 for $400,000, and that property was built in 2004. You might hire a surveyor, who could estimate that the construction cost would have been roughly $200,000. That means you would be able to make a claim of $5,000 (2.5% of $200,000) for each year the property is available for rent. If the property was only available for rent for a certain portion of a year, say 50%, you would only be able to claim $2,500.

To claim a capital works deduction on a property you brought, you'll generally need the following information:

• When the property was built and the dates that construction commenced and finished

• Who built it

• The type of construction

• Evidence that the property was rented or available to rent for the year being claimed

Working out the construction costs can be pretty complicated, so it's often worth enlisting a quantity surveyor who is qualified to estimate.

Calculating depreciation on assets

Depreciation of assets like dishwashers or air conditioners can be claimed using either the prime cost or diminishing value method.

Both methods allow you to claim the entire cost of eligible assets over the course of it's effective life, but the diminishing value method means claiming more at the start, whereas prime cost means claiming the same amount each year.

For example, let's say you buy a $2,000 ventilator fan for the property, which has a working life of 20 years, as per the ATO. Using the prime cost method, you would deduct 5% of the initial cost ($100) each year for 20 years. Using diminishing value method, though, you would deduct 10% in the first year ($200). The next year, you deduct 10% of the assets current value, factoring in depreciation ($180) and so on.

Depreciation schedule

A quantity surveyor can do up a depreciation schedule for your investment property and related assets and lay out exactly how much you can claim each financial year.

Hiring a professional can ensure you aren't missing out on any deductions and help maximise your return.

A quantity surveyor will be able to estimate your capital works deductions, as well as help with the number-crunching for your various plant items.

Check out this illustrative example of what a depreciation schedule could look like, assuming:

• Capital works depreciation is calculated as 2.5% of the building structure cost ($382,500), which amounts to $9,563 annually.

• Plant & equipment depreciation is calculated using the diminishing value method, whereby 10% of the initial plant & equipment cost ($67,500) in the first year, then the balance is reduced over the following 40 years.

Financial year	Building depreciation	Plant & equipment depreciation	Total depreciation
1	$9,563	$6,750	$16,313
2	$9,563	$6,075	$15,638
3	$9,563	$5,468	$15,030
4	$9,563	$4,921	$14,484
5	$9,563	$4,429	$13,992
6	$9,563	$3,986	$13,549
7	$9,563	$3,588	$13,151
8	$9,563	$3,229	$12,792
9	$9,563	$2,906	$12,469
10	$9,563	$2,615	$12,178
11	$9,563	$2,354	$11,917
12	$9,563	$2,118	$11,681
13	$9,563	$1,906	$11,469
14	$9,563	$1,716	$11,279
15	$9,563	$1,544	$11,107
16	$9,563	$1,390	$10,953
17	$9,563	$1,251	$10,814
18	$9,563	$1,126	$10,689
19	$9,563	$1,013	$10,576
20	$9,563	$911	$10,474
21	$9,563	$820	$10,383
22	$9,563	$738	$10,301
23	$9,563	$664	$10,227
24	$9,563	$597	$10,160
25	$9,563	$537	$10,100
26	$9,563	$484	$10,047
27	$9,563	$436	$9,999
28	$9,563	$393	$9,956
29	$9,563	$354	$9,917
30	$9,563	$318	$9,881
31	$9,563	$286	$9,849
32	$9,563	$257	$9,820
33	$9,563	$231	$9,794
34	$9,563	$208	$9,771
35	$9,563	$187	$9,750
36	$9,563	$169	$9,732
37	$9,563	$152	$9,715
38	$9,563	$137	$9,700
39	$9,563	$123	$9,686
40	$9,563	$111	$9,674

This schedule is for illustrative purposes only. Actual depreciation may vary based on specific details and changes in tax laws. If you're unsure, consult with a tax professional for precise calculations and advice.

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