Rental property depreciation is a valuable tax deduction that allows owners to claim the gradual wear and tear of their building and its assets.
It reduces taxable income without requiring any yearly cash outlay, making it one of the most effective deductions available for rental properties.
While many owners understand common deductions such as interest or repairs, fewer recognise how depreciation works or how much it can improve annual tax outcomes. The Australian Taxation Office (ATO) supports this process through a tax depreciation schedule, which outlines all eligible building costs and assets to ensure nothing is missed.
A clear understanding of rental property depreciation helps owners plan better, manage ongoing costs and make informed decisions about upgrades and long-term strategy.
Why Depreciation Matters for Rental Properties
Depreciation plays an important role in reducing the taxable income generated from a rental property. Since it accounts for the natural decline in value of the building and its assets, it allows owners to claim deductions without spending money each year. This makes it a powerful tool for improving the overall financial position of the property.
By claiming depreciation correctly, owners can lower their yearly tax bill and increase the property’s net return. The savings created from deductions can be reinvested back into the property. Many owners who do not understand the rules miss out on significant tax savings, often because they assume their property is too old or too simple to qualify.
A strong understanding of depreciation ensures owners take full advantage of the deductions available and supports better planning for long-term holding costs.
The Two Types of Depreciation
Depreciation for rental properties falls into two main categories. Understanding the difference helps owners claim the right deductions and avoid missing eligible items.
Capital Works (Division 43)
Capital works deductions cover the structural elements of the property, including walls, roofing, foundations, plumbing and electrical systems. These items are generally claimed at a fixed depreciation rate of 2.5 percent per year over forty years. Capital works can also include approved renovations or capital improvements completed by either the current or previous owner, provided the work meets ATO requirements.
Plant and Equipment (Division 40)
Plant and equipment refers to the removable or mechanical assets within the property. Common examples include carpets, appliances, blinds, air conditioning units and hot water systems. These depreciating assets decline at different rates based on their effective life. Legislative changes introduced in 2017 restrict depreciation on second-hand plant and equipment assets in residential rental property, but newly installed items can still be claimed.
Understanding these two categories makes it easier to identify all eligible deductions and ensures the tax depreciation schedule accurately reflects the property’s full value.
Can Older Rental Properties Still Claim Depreciation?
Many owners assume that older rental properties offer little or no depreciation benefits, but this is not always the case. Even if the building itself does not qualify for the full forty-year capital works deduction, there may still be significant opportunities to claim.
Capital works deductions may apply if the property was built after 1987 or has been substantially renovated to meet ATO eligibility rules. Renovations completed by previous owners can also qualify, even if documentation is limited, as a qualified quantity surveyor can estimate construction costs.
There are also strong deductions available for new assets installed by the current owner, such as appliances, flooring or heating and cooling systems. These items can often provide meaningful yearly claims.
Older rental properties are not automatically excluded from depreciation. A detailed assessment helps determine what can still be claimed and ensures owners do not overlook deductions they are entitled to.
What a Depreciation Schedule Includes
A depreciation schedule is essential for claiming a rental property’s depreciation accurately. It outlines every eligible deduction and ensures nothing is overlooked at tax time.
Why the Schedule Matters
The schedule provides a detailed breakdown of capital works and plant and equipment items, along with the rate at which each asset can be claimed. Accountants rely on this document to calculate yearly depreciation, making it a key part of managing a rental property’s tax position.
How the Schedule Is Prepared
A qualified quantity surveyor inspects the property to identify and record all depreciable items. This process often includes:
- Measuring and photographing assets
- Reviewing construction dates and renovation history
- Listing each eligible item and estimating its effective life under ATO guidelines
- Calculating both Division 40 and Division 43 deductions
This detailed approach ensures that all deductions, including past renovations, are captured correctly.
Cost and Longevity
A depreciation schedule is usually prepared once and remains valid for up to forty years. The cost of obtaining it is generally tax-deductible. Many owners find that the deductions they can claim in the first financial year alone can outweigh the cost of the schedule.
A well-prepared schedule not only maximises tax savings but also gives owners clear insight into the long-term value of their property’s assets.
How Depreciation Impacts Returns
Depreciation can make a noticeable difference to the overall performance of a rental property. Because it reduces taxable income, it directly improves the property’s net return without requiring additional spending.
For example, if a property generates rental income that places the owner into a higher tax bracket, depreciation helps lower the taxable portion of that income.
Depreciation can also help balance a property that is close to neutral or slightly negative in its yearly cash flow. When all eligible deductions are claimed, the after-tax position may become more manageable, particularly in the early years of ownership when assets and fittings have a higher claimable value.
By understanding how depreciation interacts with income, expenses and tax returns, owners can make clearer decisions about long-term planning, upgrades and potential improvements to the property.
Common Mistakes and Missed Opportunities
Many rental property owners miss valuable deductions each year simply because they are unaware of what qualifies. Understanding the most common mistakes can help ensure nothing is overlooked.
Not claiming depreciation at all
Some owners assume their property is too old or not eligible, which leads to missed deductions that may still apply under both capital works and plant and equipment.
Ignoring previous renovations
Renovations completed by past owners can be claimable, even when receipts are not available. Quantity surveyors can estimate construction costs to include these capital improvements.
Forgetting small or low-value items
Assets under three hundred dollars, such as certain appliances or fittings, may qualify for immediate deductions. These smaller claims can add up over time.
Not updating a schedule after major improvements
Significant upgrades such as new flooring, bathrooms or kitchens should be added to an existing schedule so that the correct deductions can continue.
Relying only on receipts rather than an expert assessment
Not all depreciable items are obvious. A professional assessment often uncovers additional assets that owners may miss on their own.
Avoiding these mistakes ensures that all eligible deductions are claimed and that the property’s tax benefits are maximised.
When to Update or Review a Depreciation Schedule
A depreciation schedule is designed to last for many years, but certain changes to a property can affect the deductions available. Reviewing the schedule at the right time ensures all new assets and improvements are included accurately.
After major renovations
Upgrades such as new kitchens, bathrooms, flooring or extensions introduce new eligible assets. Adding these items to the schedule ensures future deductions reflect the property’s updated value.
When existing assets are replaced
New appliances, air conditioners, hot water systems or other plant and equipment items can be claimed from the date they are installed. Updating the schedule captures these changes.
When a property changes from owner-occupied to a rental
If a property is newly converted into a rental, a fresh assessment is often needed to identify the value of existing assets at the time it becomes income-producing.
If tax legislation changes
Adjustments to ATO rules, such as the 2017 restriction on second-hand plant and equipment, can affect eligibility. Ensuring the schedule reflects current requirements helps maintain compliance.
Regular reviews do not need to be done every year, but checking the schedule after major updates keeps it accurate and ensures deductions remain correct.
How Industry Knowledge Supports Better Property Decisions
Understanding depreciation is important, but knowing how it relates to the wider management of a rental property can be just as valuable. Informed decision making often comes from having access to current market trends, property condition insights and reliable information about upgrades that hold long-term value.
Features such as modern appliances, durable flooring and efficient heating or cooling systems can improve rental appeal and may also contribute to stronger future depreciation claims. Keeping track of past improvements through rental history, sale records or condition reports can also help identify renovations that still qualify for deductions, even when documentation is limited.
Accurate depreciation schedules rely on more than basic receipts. Many property owners draw on the expertise of professionals such as quantity surveyors or tax specialists to ensure all eligible items are identified and calculated in line with ATO rules. These connections help maintain compliance and ensure deductions reflect the property’s full value.
With the right information and professional support, property owners can make confident decisions that enhance rental performance and support long-term planning.
Making the Most of Depreciation
Rental property depreciation is one of the most effective ways for owners to reduce taxable income and improve the financial performance of their property. By understanding how capital works and plant and equipment deductions operate, owners can make better decisions about upgrades, maintenance and long-term planning. A well-prepared depreciation schedule ensures every eligible deduction is claimed and provides clarity that supports confident property management.
If you’re unsure what depreciation applies to your property, a qualified quantity surveyor or tax professional can help point you in the right direction.
This article contains general information provided by Duo Tax and does not constitute tax or financial advice. Property owners should seek advice specific to their circumstances.
