Depreciation
Depreciation is a valuable tax minimisation strategy for investment property owners, allowing you to claim deductions for the decline in value of building structures and plant & equipment over time.
When you spend cash on renovations and equipment for the property you cannot immediately write it off as a deduction. Instead it is added to the cost base; and then depreciated to zero over it's useful life.
Depreciation is a normal tax deduction; whereas selling with a high cost base would reduce capital gains. As a result of the Capital Gains Discount, getting a depreciation schedule in place is a more valuable and more timely tax minimisation method than forgetting about it.
Benefit of a Depreciation Schedule Table Example
| Year | Property Value | Cost Base | Depreciation | Tax Saving |
|---|---|---|---|---|
| 0 | $1,000 | $1,100 | - | - |
| 1 | $1,050 | $1,060 | $40 | $18.8 |
| 2 | $1,103 | $1,020 | $32 | $15.0 |
| 3 | $1,158 | $988 | $26 | $12.0 |
| 4 | $1,216 | $962 | $20 | $9.6 |
| 5 | $1,276 | $942 | $16 | $7.7 |
| Total | - | - | $134 | $63.1 |
Calculation Comparison
| Method | Capital Gains | CGT Payable | Tax Deduction | Total Tax |
|---|---|---|---|---|
| Do Nothing | $76 | $17.9 | $0 | $17.9 |
| Depreciation Schedule | $234 | $55.0 | $63.1 | -$8.1 |
| Benefit | - | - | - | $26.0 |
All figures in thousands. Property value increases 5% annually. Depreciation at 20% diminishing value on $200k equipment. Tax saving at 47% rate. Year 6 sale with $100k selling costs. CGT calculated with 50% discount and 47% tax rate.
There are several categories: capital works (structural elements), plant & equipment (fixtures and fittings), and low-cost items.
Types of Depreciation
| Type | Rate | Life | Method |
|---|---|---|---|
| Capital Works Structural, Bathrooms, Walls, Kitchens, Fences, etc |
2.5% | 40 years | Straight Line |
| Floors & A/C | 20% | 10 years | Diminishing Value |
| Carpet & Furniture | 28.57% | 7 years | Diminishing Value |
| Electronics & White goods | 40% | 5 years | Diminishing Value |
| Low-cost items < $300 | 100% | Immediate | Immediate Deduction |
Note: Diminishing Value rate = 200% ÷ years
FAQ
Typically $5,000-$15,000+ annually depending on property value. The exact amount depends on the property's age, value, and fixtures.
Recommended for accuracy and compliance. Professional schedules ensure you claim all available deductions and meet ATO requirements.
Capital works are building structure (2.5% rate), plant & equipment are removable items (varying rates based on asset life).
Yes, if properly classified and documented. Renovations may include both capital works and plant & equipment components.
From the day the property is first available for rent after the works are finished. Pro-rate the first/last year by days.
Yes for capital works (2.5%/40y), using a Quantity Surveyor (QS) estimate if the actual cost is unknown.
No. For plant & equipment, you choose once per asset (Prime Cost or Diminishing Value) when it's first used, then stick with it. Diminishing Value is higher upfront depreciation so often better tax minimisation method.
Only the income-producing days count as taxable deductions, the depreciation occurs regardless.
Apportion by a reasonable basis (typically floor area × days). Common areas are shared proportionally.
Yes—put eligible low-cost/low-value plant into a low-value pool (rates are set; it accelerates claims). Capital works never go in the pool.
Often yes for plant items ≤ $300 used to earn income (and not part of a set). If it's part of a set over $300 total you need to depreciate it.
Repairs (fixing wear & tear) are usually immediate deductions. Improvements (better/extra functionality) are capital.
Total depreciation claimed reduces your CGT cost base, which can increase your capital gain when you sell.
You may claim a balancing deduction for any unclaimed written-down value of that plant item when it's discarded (not for capital works).
No—claim up to the contract date (pro-rate by days).
New or recently renovated properties typically have bigger capital-works claims available for longer (close to the full 40 years).
QS report, invoices, completion dates, photos/plans/DA approvals, appliance receipts, dates first available for rent, and any apportionment notes (area/days). Keep for at least 5 years after lodging the return for the sale year.
How to track depreciation with SelfManaged
Record depreciation schedules and track deductions. SelfManaged helps you monitor depreciation benefits and ensure compliance.