Insights · Property and lending
Depreciation on investment property: new vs established
Depreciation is the deduction for the wear and tear on a building and the items in it. It doesn’t cost you cash each year, which makes it one of the most valuable deductions an investor has. How much you can claim depends a lot on whether the property is new or established.
Two types of depreciation
Capital works (Division 43) covers the building itself and structural items: walls, roof, floors, built-in kitchen cupboards, bathrooms, driveways and fences. For residential buildings whose construction started after 15 September 1987, you can generally claim 2.5% of the construction cost each year for 40 years.
Plant and equipment (Division 40) covers removable or mechanical items: ovens, cooktops, dishwashers, air conditioners, hot water systems, carpets, blinds and similar. These are depreciated over their effective life, which is much shorter, so the deductions are larger in the early years.
The 2017 change for established properties
For residential properties acquired after 7:30pm on 9 May 2017, individual investors generally can’t claim depreciation on second-hand plant and equipment, meaning the fixtures that were already in the property when they bought it.
That means:
| New property | Established property (bought after 9 May 2017) | |
|---|---|---|
| Capital works on the building | Yes | Yes, for the remaining years if built after Sept 1987 |
| Fixtures that came with it | Yes (they’re new) | No |
| New fixtures you install | Yes | Yes |
| Renovations you do | Yes | Yes, as capital works or new plant |
The restriction doesn’t apply to commercial properties, or to properties held by companies, super funds (other than SMSFs) and some other entities. It also catches fixtures you used privately first: if you lived in the home before renting it out, the fixtures you used there generally can’t be depreciated either.
Established properties still have deductions
Even with the 2017 change, an established property usually has:
- Capital works on the original construction, if built after 15 September 1987, for the rest of its 40-year life.
- Capital works on previous renovations by earlier owners, such as a new kitchen or bathroom, even if the house itself is older. A quantity surveyor can estimate these.
- Depreciation on anything new you install, from a replacement oven to new carpet.
New properties get the most
A brand new property, or one that’s been substantially renovated before you buy, gives you capital works plus full depreciation on all the new fixtures. That’s one reason new properties often have higher deductions in the early years. It’s not a reason on its own to choose one property over another, but it belongs in the comparison.
Repairs versus improvements
Repairs that restore something to its original condition, like fixing a broken window or patching a roof, are deductible straight away. Replacing something entirely, or improving it, is capital: depreciated over time. Initial repairs to fix problems that existed when you bought the property aren’t deductible at all; they’re added to the cost base.
Get a depreciation schedule
A tax depreciation schedule from a qualified quantity surveyor sets out what you can claim each year for the life of the property. It typically costs a few hundred dollars, the fee is deductible, and for most properties built in the last few decades it pays for itself many times over. You only need one, updated if you renovate.
Depreciation also reduces your cost base, which increases the capital gain when you sell, but the benefit of deductions now, together with the 50% CGT discount later, usually leaves you ahead.
We include your depreciation schedule in your rental property schedule every year. See personal tax returns and negative gearing explained.