Depreciation
A deduction for the ageing of a building and its fittings, claimable without spending any cash that year.
Investment properties wear out, and the tax system recognises this through depreciation. There are two components: capital works, covering the building structure, and plant and equipment, covering removable items such as ovens, carpets and air conditioners.
Depreciation is unusual among deductions because it requires no cash outlay in the year you claim it. The money was spent when the property was built or the appliance bought, yet the deduction arrives every year for decades.
This is what turns many properties from cashflow negative into after-tax positive. A new build might generate $8,000 to $12,000 of depreciation in early years, a substantial deduction costing nothing out of pocket.
The deduction you do not pay for
A property with $9,000 of annual depreciation cuts taxable income by $9,000. At a 37% marginal rate that is about $3,330 back in your pocket, with no cash spent that year to earn it.
The bit people get wrong
Depreciation claimed reduces your cost base, which increases your eventual capital gain. It is largely a deferral rather than a permanent saving — though deferring tax for twenty years and then discounting the gain by half is still a substantial win.
Common questions
Can I claim depreciation on a second-hand property?
Rules tightened in 2017. Plant and equipment in a previously used residential property generally cannot be depreciated by a later buyer, but capital works on the structure usually still can.
Do I need a depreciation schedule?
For anything beyond the simplest case, yes. A quantity surveyor's schedule is itself deductible and typically uncovers far more in deductions than it costs to prepare.
Does depreciation apply to my own home?
No. Depreciation is only available on income-producing assets, so an owner-occupied home generates no deduction.
Run your own numbers
Related terms
Source: Australian Taxation Office