How Property Depreciation Works in Australia
Depreciation is one of the most valuable tax deductions available to property investors, yet many investors leave thousands of dollars on the table by not claiming it. In simple terms, the ATO recognises that buildings and their fixtures wear out over time, and allows you to claim this decline in value as a tax deduction -- even though you have not spent any cash.
Division 43: Building Allowance
Division 43 covers the structural elements of the building: walls, floors, roof, doors, windows, and fixed structures. For residential properties built after 15 September 1987, you can claim 2.5% of the original construction cost per year for up to 40 years. If the construction cost was $300,000, you can deduct $7,500 per year.
Division 40: Plant and Equipment
Division 40 covers removable assets and fixtures: carpet, blinds, air conditioning units, hot water systems, ovens, dishwashers, and smoke alarms. Each asset has an "effective life" set by the ATO, and you can depreciate it over that period using either the diminishing value method (faster deductions early on) or the prime cost method (even deductions each year).
Important Rules for Second-Hand Properties
Since 9 May 2017, investors who purchase second-hand residential properties can no longer claim Division 40 depreciation on existing plant and equipment (items installed by a previous owner). However, Division 43 building allowance is still available, and any new plant and equipment you install can be depreciated. This rule makes depreciation schedules even more important for new builds and off-the-plan purchases.
See how depreciation deductions affect your after-tax position with our Negative Gearing Calculator, and factor them into your full Cash Flow Calculator analysis.