Property depreciation is one of the most underutilised tax deductions available to Australian investors. Many property owners claim obvious expenses like mortgage interest and council rates but leave thousands of dollars of legitimate depreciation deductions unclaimed every year — simply because they don't understand what they're entitled to or how the system works. A proper quantity surveyor's depreciation schedule on a modern apartment can generate $8,000–$20,000 in first-year deductions, translating to $3,000–$7,000 in tax savings at a 37% marginal rate. This guide explains exactly how to claim them.
What Is Property Depreciation?
Depreciation is the deduction you claim for the decline in value of assets over time. In an investment property context, there are two separate categories of depreciation, governed by different parts of the Income Tax Assessment Act:
- Division 43 (Capital Works Deduction): The decline in value of the building structure itself — the concrete, bricks, roof, and fixed fittings. This is claimed at a flat rate of 2.5% per year over 40 years, and only applies to buildings constructed after 16 September 1987 (or July 1982 for certain commercial properties). You cannot claim Div 43 on a building constructed before that date.
- Division 40 (Plant and Equipment Depreciation): The decline in value of removable assets within the property — carpets, dishwashers, air conditioning units, hot water systems, blinds, and so on. Each item has an ATO-prescribed "effective life" and is depreciated over that period, either using the diminishing value method or the prime cost method.
To maximise both types of deductions, you need a depreciation schedule prepared by a registered quantity surveyor. Use our Property Depreciation Calculator to estimate your potential annual deduction before commissioning a full report.
Division 40: Effective Lives for Common Assets
| Asset | ATO Effective Life (Years) | Diminishing Value Rate | Example: $3,000 Asset — Year 1 Deduction |
|---|---|---|---|
| Carpet | 10 years | 20% | $600 |
| Air conditioning (split system) | 10 years | 20% | $600 |
| Dishwasher | 10 years | 20% | $600 |
| Hot water system (electric storage) | 12 years | 16.67% | $500 |
| Oven / cooktop | 12 years | 16.67% | $500 |
| Blinds / curtains | 6 years | 33.33% | $1,000 |
| Ceiling fans | 10 years | 20% | $600 |
| Smoke alarms | 6 years | 33.33% | $1,000 |
| Security system | 5 years | 40% | $1,200 |
The diminishing value rate is double the prime cost rate (2 ÷ effective life). Most investors prefer the diminishing value method because it front-loads deductions in the early years when the investment is often negatively geared and the tax benefit is most valuable.
Worked Example: $680,000 Apartment, First-Year Depreciation
Let's model a 2-bedroom apartment in Brisbane purchased for $680,000 in 2024 (new build completed 2022):
Division 43 (building at construction cost $420,000):
- Annual Div 43 deduction: $420,000 × 2.5% = $10,500/year
- Available for 40 years from date of construction completion
Division 40 (plant and equipment, total value $35,000 across all assets):
- Year 1 Div 40 deduction (diminishing value, approx): ~$7,800
- This reduces each year as assets depreciate
Total first-year depreciation deduction: $10,500 + $7,800 = $18,300
At a 37% marginal tax rate, this $18,300 deduction saves $6,771 in income tax in year one — entirely non-cash. The property investor has received a $6,771 reduction in their tax bill without spending a single additional dollar.
Example Depreciation Schedule: Years 1–5
| Year | Division 43 (Building) | Division 40 (Plant & Equipment) | Total Depreciation | Tax Saving at 37% |
|---|---|---|---|---|
| Year 1 | $10,500 | $7,800 | $18,300 | $6,771 |
| Year 2 | $10,500 | $6,240 | $16,740 | $6,194 |
| Year 3 | $10,500 | $4,992 | $15,492 | $5,732 |
| Year 4 | $10,500 | $3,994 | $14,494 | $5,363 |
| Year 5 | $10,500 | $3,195 | $13,695 | $5,067 |
| 5-Year Total | $52,500 | $26,221 | $78,721 | $29,127 |
Why You Need a Quantity Surveyor Report
The ATO requires that depreciation schedules be prepared by a qualified tax professional or registered quantity surveyor (QS). You cannot estimate construction costs yourself — a QS physically inspects the property and uses cost data to determine the construction cost of the building and the value of each depreciable asset.
A depreciation schedule typically costs $500–$900 and is itself tax-deductible in the year of purchase. The report covers the entire life of the property, so it only needs to be commissioned once (though it should be updated after renovations). The ROI on commissioning a QS report is almost always strongly positive — a $700 report that generates $6,000+ in first-year tax savings pays for itself more than eightfold.
Important Restrictions Introduced in 2017
From 1 July 2017, the ATO significantly restricted Division 40 depreciation for second-hand properties. If you purchased an existing (previously occupied) residential property after 9 May 2017, you can no longer claim Div 40 depreciation on plant and equipment that was in the property at the time of purchase. This restriction does not apply to: new builds, properties where you perform substantial renovations, commercial properties, or Div 43 capital works deductions (which remain claimable).
This means the depreciation benefit is now substantially more valuable for new property purchases than existing ones — another factor in the analysis when choosing between new and established investment properties.