Understanding Depreciation Deductions
Depreciation is often the most overlooked tax deduction for landlords. Learn how to claim thousands of dollars for wear and tear on your investment property.
What is Depreciation?
Depreciation allows you to claim a tax deduction for the decline in value of your rental property's building structure and assets due to wear and tear, age, and obsolescence.
This also means that you can't claim the full cost in the financial year you paid for certain works and upgrades to your property; you have to claim it over time through depreciation.
Unlike most rental property expenses that require you to spend money, depreciation is a non-cash deduction – meaning you can reduce your taxable income without actually spending anything in the current year.
Two Types of Depreciation
1. Capital Works Deductions (Division 43)
The capital works deduction applies to the building structure itself:
Claimable on the overall building
- Rate: 2.5% per year
- Period: 40 years from construction completion date
- Eligible buildings: Constructed after 15 September 1987
- Typical items: Original walls, roof, floors, concrete and fixed structural elements
Claimable for new capital works you do
- Extensions, structural renovations and major fixed improvements
- Kitchen/bathroom structural works, built-in cabinetry and tiling
- New fixed additions (decks, pergolas, retaining walls where capital in nature)
- Generally added to your capital works pool and claimed at 2.5% from completion
For a building that cost $400,000 to construct, you can claim $10,000 per year for 40 years.
Treatment can differ depending on when you purchased and what asset type you are claiming. For a broader breakdown of structural works and how to classify upgrades, see our capital works guide.
2. Plant and Equipment Deductions (Division 40)
Plant and equipment refers to removable assets that wear out over time:
- Carpets and floor coverings
- Blinds and curtains
- Hot water systems
- Air conditioning units
- Ceiling fans
- Dishwashers, ovens, cooktops
- Smoke alarms
- Light fittings
These items depreciate at different rates depending on their effective life (e.g., carpets over 8 years, ovens over 8 years, air conditioners over 10-15 years).
Depreciation Methods
You can choose between two methods for depreciating plant and equipment. Both result in the same total deduction, but the amount deductible per year is dependant on the method you choose:
Prime Cost (Straight-Line) Method
The asset's value depreciates by the same amount each year.
Formula: Asset cost ÷ Effective life = Annual deduction
Example: A $3,000 dishwasher with an 8-year effective life = $375 deduction per year.
Diminishing Value Method
The asset depreciates faster in early years, then slows over time.
Formula: (Remaining value × 200%) ÷ Effective life = Annual deduction
Usually produces larger early-year deductions, which can improve short-term cash flow.
Mint's Fresh Take
The diminishing value method gets you the highest deduction earlier, which can help with cash flow and usually reflects that assets lose most of their value in the first few years.
When You Can Immediately Claim an Asset
Some lower-cost assets may be immediately deductible rather than depreciated over years.
- Common threshold example: assets costing $300 or less can often be claimed immediately for individual investors, where they are used to produce non-business assessable income and meet ATO conditions.
- Watch grouping rules: if items form a set or are substantially identical, immediate deduction may not apply item-by-item.
- Higher-cost assets: generally need to be depreciated under Division 40, even if they're replacing an existing asset (e.g. replacing an oven).
Mint Tip
Mint stores your depreciation schedule details and helps calculate asset life and depreciable amounts each year, so tax time is faster and easier. Update your schedule whenever you complete major renovations or add new assets.
Renovations and Improvements
When you renovate or improve the property:
- New or replaced plant and equipment (appliances, carpets) can be depreciated from installation
- Structural improvements are added to capital works and depreciated at 2.5% per year
- Keep invoices and receipts to update your depreciation schedule
Mint's Takeaway
- Depreciation is a non-cash deduction that can save thousands in taxes without requiring current-year spending.
- Capital works deductions apply to building structure at 2.5% per year for 40 years (post-1987 buildings).
- Plant and equipment depreciation applies to removable assets like carpets, appliances, and blinds.
- Budget 2017 changes limit second-hand property buyers to claiming only personally installed assets.
- A quantity surveyor's depreciation schedule ($600-$1,000) typically identifies $10,000+ in total deductions.
- Update your schedule after renovations to claim new assets.
- Depreciation must be claimed each year – you can't go back and claim missed years beyond the amendment period.
Mint simplifies depreciation tracking by storing your schedule and automatically calculating annual deductions.