Tax Depreciation Explained: A Guide for Property Investors

Q: What can be depreciated?

Generally, depreciation falls into two categories. ##### Capital works This relates to the building itself and certain structural improvements. Examples may include: - Walls - Roof - Concrete slab - Kitchen cabinetry - Built-in wardrobes - Driveways - Patios For eligible residential properties, capital works deductions are generally claimed over many years, subject to Australian tax legislation. ##### Plant and equipment This includes removable fixtures and fittings within the home. Examples include: - Air conditioning units - Carpet - Blinds - Ovens - Cooktops - Hot water systems - Dishwashers These assets generally have their own effective life, which determines how they're depreciated for tax purposes.

Hayley Hart

Sep 1

3 min read

If you're researching investment properties, you've probably heard someone mention tax depreciation.

It's one of the potential financial benefits of owning an investment property, but it's also one of the most misunderstood.

The good news? You don't need to be an accountant to understand the basics.

Let's take a look at what tax depreciation is, how it works, and why many investors choose to build new homes.

What is tax depreciation?

Just like a car, parts of a home naturally wear out over time.

The Australian tax system recognises this by allowing eligible property investors to claim depreciation deductions on certain assets within an income-producing property. These deductions may reduce your taxable income, depending on your personal circumstances.

It's important to remember that depreciation is a tax deduction - it isn't money paid directly into your bank account.

What can be depreciated?

Generally, depreciation falls into two categories.

Capital works

This relates to the building itself and certain structural improvements. Examples may include:

Walls
Roof
Concrete slab
Kitchen cabinetry
Built-in wardrobes
Driveways
Patios

For eligible residential properties, capital works deductions are generally claimed over many years, subject to Australian tax legislation.

Plant and equipment

This includes removable fixtures and fittings within the home. Examples include:

Air conditioning units
Carpet
Blinds
Ovens
Cooktops
Hot water systems
Dishwashers

These assets generally have their own effective life, which determines how they're depreciated for tax purposes.

Why do investors often choose new homes?

New homes typically contain brand-new fixtures, fittings and building components. This means there may be more depreciation available than in an older property where assets have already aged.

While every investment is different, this is one of the reasons many investors consider new house and land packages.

Do I need a depreciation schedule?

In most cases, yes. A depreciation schedule is prepared by a qualified quantity surveyor and outlines the depreciation deductions that may be available for your investment property over time. Your accountant can then use this information when preparing your tax return.

Is depreciation the same as negative gearing?

No. Although they're often mentioned together, they work differently.

Negative gearing occurs when the deductible expenses of owning your investment property exceed the income it earns.
Depreciation is simply one of the deductions that may contribute to those overall expenses.

If you haven't already, read our blog on Negative Gearing & Capital Gains Tax to understand how these concepts work together.

Does every investment property qualify?

Not necessarily. The depreciation available depends on factors such as:

The age of the property.
When construction commenced.
The type of assets within the property.
Current Australian taxation legislation.

Your accountant or quantity surveyor can help determine what deductions may be available.

Should depreciation influence your investment decision?

Depreciation can certainly improve the overall financial picture of an investment property, but it shouldn't be the only reason you buy. A good investment starts with choosing the right property in the right location.

Things like rental demand, future growth, affordability and your long-term goals are all just as important.

Think of depreciation as an added benefit - not the reason to invest.

How can we help?

Whether you're purchasing your first investment property or expanding your portfolio, we're here to help you find quality house and land opportunities across South East Queensland.

We work alongside trusted brokers, builders and your professional advisers to help you make informed decisions and build a property portfolio with confidence.

If you're ready to explore investment opportunities, we'd love to help.

Disclaimer: This article contains general information only and is not financial or taxation advice. Depreciation rules are governed by Australian taxation legislation and may change over time. The deductions available depend on your individual circumstances and the characteristics of the property. We recommend seeking advice from a qualified accountant and engaging a registered quantity surveyor before making any investment decisions.