Property Depreciation Guide for Landlords 2026
How to claim $3,000-$12,000/year in depreciation deductions on your investment property
The Hidden Deduction Landlords Miss
Most landlords leave $3,000-$12,000/year on the table by not claiming property depreciation. Unlike repairs and interest (which require cash spending), depreciation is a non-cash deduction - you get tax savings without spending a dollar.
Result: A $600 depreciation schedule can save you $30,000-$50,000 over 10 years.
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What is Property Depreciation?
Property depreciation is a tax deduction for the decline in value of your investment property and its fixtures over time. Unlike most deductions that require you to spend money (repairs, interest, rates), depreciation is entirely non-cash - you claim it based on ATO depreciation schedules.
For landlords, this means:
- No money spent - Claim deductions without paying anything
- Automatic annual claims - Deduct every year the property is rented
- Significant tax savings - $3,000-$12,000 annual deductions are typical
- Improves cash flow - Reduces your tax bill, increasing rental yield
Income: $120,000 salary + $28,000 rental income = $148,000 total
$5,500 capital works + $3,700 plant & equipment
$9,200 × 37% = $3,404 back at tax time
Over 10 years, Sarah saves $34,040 in tax from a $600 depreciation schedule
Two Types of Depreciation for Landlords
The ATO allows landlords to claim depreciation on two distinct categories. Understanding the difference is crucial for maximizing your deductions.
Capital Works vs Plant & Equipment Depreciation
| Feature | Capital Works (Division 43) | Plant & Equipment (Division 40) |
|---|---|---|
| What it covers | Building structure itself | Removable items and fixtures |
| Examples | Walls, roof, floors, foundations | Appliances, carpets, blinds |
| Infrastructure | Fixed plumbing and electrical | Hot water, air con, dishwasher |
| Depreciation rate | Fixed at 2.5% per year | Variable: 10-40% per year |
| Depreciation period | 40 years | 5-20 years |
| Eligibility | Properties built after Sept 1987 | All properties |
| Removability | ❌ Cannot be removed | ✅ Can be physically removed |
| Key advantage | Larger deduction on newer properties | Higher rates, shorter lifespan |
Capital Works Deduction (Division 43)
The capital works deduction applies to the building structure itself - the permanent, non-removable parts of your investment property.
What Qualifies for Capital Works?
Structural Components (2.5% per year):
Building Structure:
- • Walls (internal and external)
- • Roof and ceiling structure
- • Floors and foundations
- • Staircases and balconies
Fixed Services:
- • Plumbing pipes (in walls/floors)
- • Electrical wiring
- • Built-in cupboards
- • Fixed heating/cooling ducts
Capital Works Eligibility Rules
To claim capital works deductions, your property must meet these criteria:
- Construction completed after 15 September 1987 (older properties cannot claim)
- Used for income-producing purposes (rental property qualifies)
- Claim starts when property is first rented (not purchase date)
- Deduction rate is fixed at 2.5% per year for 40 years
Capital Works Calculation Formula
Annual Capital Works Deduction = Construction Cost × 2.5%
Example: Building constructed in 2015 for $500,000
Annual deduction = $500,000 × 2.5% = $12,500 per year
Plant & Equipment Depreciation (Division 40)
Plant and equipment refers to removable items and fixtures in your investment property - things that can be physically detached and taken away.
Common Plant & Equipment Items Landlords Can Claim
| Item | Effective Life | Annual Rate | Typical Value ($) |
|---|---|---|---|
| Hot water system | 12 years | 8.33% | $1,500-$3,000 |
| Air conditioner (split) | 10 years | 10% | $2,000-$5,000 |
| Dishwasher | 10 years | 10% | $800-$1,500 |
| Oven/cooktop | 12 years | 8.33% | $1,200-$2,500 |
| Carpet | 8 years | 12.5% | $3,000-$8,000 |
| Blinds (venetian) | 10 years | 10% | $1,500-$3,000 |
| Ceiling fans | 20 years | 5% | $300-$800 |
| Smoke alarms | 10 years | 10% | $200-$500 |
| Light fittings | 10 years | 10% | $1,000-$3,000 |
| Total typical property | 30-50 items | $15,000-$40,000 | |
Depreciation Methods: Diminishing Value vs Prime Cost
Landlords can choose between two calculation methods:
Diminishing Value (Most Common)
Higher deductions in early years, decreasing over time
Best for: Maximizing early tax savings
Prime Cost (Straight Line)
Equal deductions every year
Best for: Consistent, predictable deductions
Tip: Most landlords choose diminishing value to maximize cash flow in early ownership years.
Do You Need a Depreciation Schedule?
A depreciation schedule (also called a tax depreciation report) is a detailed document prepared by a qualified quantity surveyor that identifies ALL depreciable items in your property and calculates their decline in value.
Should You Get a Professional Schedule?
DIY Calculation vs Professional Schedule
| Feature | DIY Using ATO Tables | Professional Quantity Surveyor |
|---|---|---|
| Cost | ✅ Free to do yourself | $500-$800 (tax deductible) |
| Time investment | ⚠️ Time-consuming research | ✅ Comprehensive inspection |
| Completeness | ⚠️ Easy to miss items | Identifies 30-50+ items |
| ATO compliance | ⚠️ Risk of audit questions | ✅ ATO-compliant documentation |
| Audit protection | ❌ No guarantee of accuracy | ✅ Accepted in audits |
| Claim potential | Limited to obvious items | Often finds $50K-$200K in claims |
| ROI | Risk leaving $5K-10K/year unclaimed | Pays for itself in Year 1-2 |
When You Should Get a Professional Schedule
Get a schedule if ANY of these apply:
- ✅ Property built after 1985 (you can claim capital works)
- ✅ Property has plant & equipment (appliances, carpet, blinds)
- ✅ You did renovations over $10,000 (major improvements)
- ✅ Property value over $400,000 (higher deduction potential)
- ✅ You're in 32.5% tax bracket or higher (bigger tax savings)
Cost vs Benefit: A $600 schedule typically uncovers $6,000-$10,000 in Year 1 deductions alone. At a 37% tax rate, that's $2,220-$3,700 tax saved - a 3-6x return on investment immediately.
How Much Can You Save with Property Depreciation?
Tax savings vary by property age, purchase price, and your marginal tax rate. Here are typical scenarios for Australian landlords:
New Property (0-5 years)
Property: $700,000
Annual depreciation: $10,000-$15,000
Capital works: $8,000/year
Plant & equipment: $5,000-$7,000/year
Tax Saving (37% rate):
$3,700-$5,550/year
Established (10-20 years)
Property: $600,000
Annual depreciation: $4,000-$8,000
Capital works: $5,000/year
Plant & equipment: $2,000-$3,000/year
Tax Saving (37% rate):
$1,480-$2,960/year
Older (20+ years)
Property: $500,000
Annual depreciation: $2,000-$4,000
Capital works: $3,000/year
Plant & equipment: $1,000-$1,500/year
Tax Saving (37% rate):
$740-$1,480/year
Property: $650,000 (5 years old)
$9,000/year average
$6,000/year average
Non-cash deductions
Actual money saved on tax returns
Cost of depreciation schedule: $600 | Return on investment: 46x over 10 years
Special Rules for Established Properties
In May 2017, the government changed depreciation rules for second-hand plant and equipment purchased from other investors. This impacts many landlords buying established properties.
Post-May 2017 Depreciation Rules
If you bought an established property after 9 May 2017 from another investor:
✅ You CAN Claim:
- • Capital works (building structure) - 2.5%/year
- • Plant & equipment YOU installed new
- • Items purchased from original property owner
- • Renovations and improvements you made
❌ You CANNOT Claim:
- • Second-hand items from previous investor
- • Existing carpet, blinds, appliances
- • Items installed by previous landlord
- • Pre-owned hot water, air conditioning
Exception: If you bought from the original property owner (not an investor), you can claim depreciation on existing plant and equipment.
Maximizing Depreciation on Established Properties
- Focus on capital works - Still claim 2.5% on building value ($3K-$6K/year typical)
- Install new items immediately - New carpet, blinds, appliances are fully claimable
- Document renovation costs - Any improvements create new depreciation pools
- Get a schedule anyway - Capital works alone often justify the $600 cost
How to Claim Property Depreciation on Your Tax Return
Claiming depreciation is straightforward once you have your depreciation schedule. Follow these steps:
Get Your Depreciation Schedule
Hire a qualified quantity surveyor ($500-$800). They'll inspect the property and provide a detailed report listing all depreciable items and annual deduction amounts. This is a one-time cost, valid for the property's life.
Report in Your Tax Return
In your annual tax return, report depreciation under "Rental Property Deductions":
- • Capital works: Line D1 "Capital works deductions"
- • Plant & equipment: Line D2 "Decline in value of depreciating assets"
Keep Documentation
Store your depreciation schedule and property purchase documents. The ATO may request these in an audit. Keep records for 5 years after lodging your return.
Claim Every Year
Depreciation can be claimed every year the property is rented, for up to 40 years (capital works) or until the effective life expires (plant & equipment). Use the same schedule annually - no need to update unless you do renovations.
Can I Claim Depreciation Retrospectively?
Yes! If you forgot to claim depreciation in previous years, you can amend your tax returns for up to 2 years by lodging amended assessments with the ATO.
Example: If you bought in 2022 and never claimed, you can still amend 2022-23 and 2023-24 returns to claim $6K-$10K in missed deductions = $2K-$4K refund.
Common Depreciation Mistakes Landlords Make
Avoid these costly errors that reduce your depreciation deductions or trigger ATO scrutiny:
❌ Mistake 1: Not Getting a Schedule at All
Problem: Missing $3K-$12K in annual deductions
Solution: Order a depreciation schedule within 1-2 months of settlement. The $600 cost pays for itself in Year 1.
❌ Mistake 2: Claiming Second-Hand Items Post-2017
Problem: ATO disallows claims, potential penalties
Solution: Only claim plant & equipment YOU installed or purchased from original owner. Focus on capital works for established properties.
❌ Mistake 3: Confusing Repairs with Improvements
Problem: Immediate repair deductions vs depreciation over years
Solution: Repairs (fixing existing items) = immediate deduction. Improvements (upgrades, renovations) = depreciate over time. Know the difference!
❌ Mistake 4: Including Land Value in Depreciation
Problem: Land doesn't depreciate - only buildings and fixtures
Solution: Separate land value from building value. Typically 30-40% of purchase price is land (non-depreciable).
❌ Mistake 5: Delaying the Schedule Until Tax Time
Problem: Missing deductions for the current financial year
Solution: Order your schedule within 2 months of settlement. If you buy in May, rush order to claim in the current year.
Free Property Depreciation Calculator
Want to estimate your potential depreciation deductions before ordering a schedule? Use our free calculator to see how much you could save.
Free Tool: Enter your property details (purchase price, build year, property type) and get an instant estimate of your annual depreciation deductions. See how much tax you could save over 10 years.
Ready to Claim Your Depreciation Deductions?
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