Depreciation

Depreciation in Australian property investment refers to tax deductions that recognise the gradual decline in value of the physical building and its fittings. It's one of the largest non-cash deductions available to property investors, and the figures can be substantial, especially for newer properties.

Two categories apply: Division 43 (capital works deduction) covers the building structure itself, deductible at 2.5% per year of original construction cost over 40 years, for properties built after 1987. Division 40 covers plant and equipment (appliances, carpet, blinds, air conditioning), deductible at faster rates but with significant restrictions introduced in 2017 that eliminated most Division 40 deductions for second-hand residential investors.

A newly built investment property might generate $10,000-$18,000 per year in combined Division 43 and 40 deductions. An older property might generate $1,000-$3,000. Because depreciation is non-cash (nothing actually leaves the bank account), it can turn a positive cashflow property into a tax-neutral one or a small negative gearing position into a significant tax shelter.

A quantity surveyor's depreciation schedule is usually required; they assess the property on inspection and produce a 40-year deduction schedule. The cost ($400-$700) is tax-deductible and usually pays for itself in the first year's deduction.