Depreciation is a non-cash tax deduction - you claim it without spending money in the current year. For investment property owners, this can add thousands of dollars in deductions that reduce taxable income and improve cashflow without requiring additional expenditure.

• What is depreciation? The ATO allows property investors to claim the decline in value of a building's structure and its fixtures and fittings as a tax deduction - reflecting the wear and tear that reduces the asset's value over time
• Two distinct categories: Division 43 covers the building structure itself (bricks, concrete, roof, walls); Division 40 covers plant and equipment (carpet, dishwasher, hot water system, blinds, air conditioning). Each has different rules, rates, and eligibility criteria
• Cash flow impact: On a $600k property, depreciation deductions of $12,000-$20,000/year can reduce tax payable by $3,900-$9,400 at a 32.5-47% marginal rate - turning a negatively-geared property cashflow-neutral years earlier
• Depreciation vs other deductions: Interest, rates, property management fees, and repairs are cash deductions - you spend money to claim them. Depreciation requires no current-year cash outlay, making it the most tax-efficient deduction category for property investors
• Who should get a depreciation schedule? Any investor who owns a residential property built after July 1985 (or a commercial property) should obtain a professional quantity surveyor (QS) report - the ATO requires a QS for construction cost estimates that cannot be determined from original records

Division 43 covers the capital works allowance on the building's structure. It applies to the construction cost of the building itself - not land - and is available under specific eligibility conditions.

• Rate and period: Division 43 is claimed at 2.5% per year for 40 years from the date of construction completion. A building that cost $400,000 to construct generates $10,000 per year in Division 43 deductions - consistently, every year for 40 years
• Eligibility by construction date: Residential properties must have commenced construction after 15 September 1987. Commercial properties (including short-term rental) have a different commencement date of 20 July 1982. If a property was built before these dates, no Division 43 is available
• Apportioning the claim: You only claim Division 43 for the period you owned the property and it was used to produce income. If you purchase mid-year, you calculate the pro-rata days of income-producing use
• Renovations and extensions: Capital works on a renovation you carried out (or that a previous owner carried out after the respective commencement date) also attract Division 43 at 2.5% for 40 years from the renovation completion date - separately tracked from the original building
• The 40-year clock carries forward: If you buy a second-hand property that was built in 1990, you inherit the remaining years on the Division 43 clock. A building 20 years old has 20 remaining years of 2.5% deductions at its original construction cost - not purchase price

Division 40 covers the assets inside a property - the items that wear out faster than the building itself. Each asset has an effective life set by the ATO, and investors can claim depreciation using either the prime cost or diminishing value method.

• Common Division 40 assets: Carpet (8 years effective life), vinyl/timber flooring (10-15 years), dishwasher (10 years), oven/cooktop (12 years), hot water system (12 years), air conditioning (10-20 years depending on type), blinds/curtains (6-8 years), ceiling fans (10 years), smoke alarms (6 years)
• Two depreciation methods: Prime cost spreads the asset value evenly over its effective life (e.g., $2,400 carpet ÷ 8 years = $300/year). Diminishing value front-loads the deductions - the rate is 200% ÷ effective life, applied to the remaining value. Diminishing value is almost always preferable for residential investors
• Diminishing value example - air conditioning unit: A $3,500 ducted split system with 10-year effective life. Year 1: $3,500 × 20% = $700. Year 2: $2,800 × 20% = $560. Year 3: $2,240 × 20% = $448. The front-loading maximises early deductions when rental income (and therefore tax) is typically higher
• Low value pooling: Assets under $1,000 (or with a remaining value under $1,000) can be pooled at a 37.5% diminishing value rate, simplifying record-keeping. Very low-value assets (under $100) can be written off immediately
• Immediate write-off for new assets: From 2015-2020, there were temporary full expensing measures - check current ATO guidance for any active instant asset write-off measures that may apply to residential property plant and equipment

The 2017-18 Federal Budget introduced the most significant restriction on property depreciation in decades. If you purchased a second-hand (previously used) residential property after 7:30pm on 9 May 2017, your Division 40 deductions are severely restricted.

• The restriction: For residential investment properties purchased after the Budget night announcement, plant and equipment (Division 40) deductions can only be claimed for assets you directly purchase and install - not for assets that were already in the property when you purchased it
• Practical impact: If you buy a second-hand house with existing carpet, dishwasher, and air conditioning, you cannot claim depreciation on those items. Only brand-new assets you replace or add after purchase generate Division 40 deductions
• Division 43 is unaffected: The 2017 rule change only restricts Division 40. You can still fully claim Division 43 building allowance on properties built after the relevant dates, even if the property is second-hand
• New properties are fully eligible: Brand-new residential properties purchased after May 2017 are fully exempt from the restriction - all Division 40 assets in a new property are depreciable because they have not been previously used for residential accommodation
• Off-the-plan and new builds: Buying off-the-plan or directly from a developer means you receive the full Division 43 (construction cost) and full Division 40 (all plant and equipment) depreciation entitlements - a material financial advantage over purchasing established properties of similar price
• Replacing assets post-purchase: Any asset you purchase and install after buying an established property is depreciable under Division 40. Replacing the carpet ($4,000) or installing a new air conditioning system ($3,500) generates fresh depreciation from the date of installation

The ATO accepts a qualified quantity surveyor as a 'competent professional' to estimate construction costs where original records are unavailable. For most investment property owners, a QS report is the only way to substantiate Division 43 and Division 40 claims.

• Why you can't self-estimate: The ATO does not accept the investor's own estimates of original construction cost for Division 43. A qualified QS (member of AIQS - Australian Institute of Quantity Surveyors) must prepare the report
• What a QS report includes: Estimated original construction cost of the building (for Division 43), itemised list of all plant and equipment with age, condition, and ATO effective life (for Division 40), a depreciation schedule projecting annual deductions for 40 years under both prime cost and diminishing value
• Cost: QS reports typically cost $550-$900 for residential properties. This cost is itself immediately deductible as a tax return preparation expense (it's a cost of managing your tax affairs). Net after-tax cost at 37% marginal rate: $350-$570
• Ordering timing: Order the report as soon as practical after settlement. The QS will inspect the property (or use detailed photographs and council records) and typically delivers within 2-4 weeks. You can use the report retrospectively for prior years via an amendment (generally within 2 years for individuals)
• When to update: If you carry out significant renovations (new kitchen, bathroom, flooring replacement), order a supplementary QS report or updated schedule to capture the new Division 43 (on renovation construction cost) and replacement Division 40 assets

Depreciation is not a free lunch - it reduces your cost base, increasing the capital gain when you eventually sell. Understanding this interaction prevents tax surprises and informs your holding strategy.

• Division 43 reduces cost base: Every year you claim Division 43 building allowance reduces your cost base by the amount claimed. If you claim $10,000/year for 10 years, your cost base is $100,000 lower - generating a larger capital gain on sale
• Division 40 does not reduce cost base: Plant and equipment (Division 40) deductions do NOT reduce the property's cost base. Instead, proceeds attributable to plant and equipment are assessed as balancing adjustment amounts (ordinary income) - at full marginal rate, with no 50% CGT discount
• The 50% CGT discount still applies to Division 43: The capital gain arising from Division 43 cost base reduction qualifies for the 50% CGT discount (for properties held over 12 months). So while the gain is larger, only half is included in assessable income - reducing but not eliminating the tax impact
• Long hold strategies: Investors planning to hold 20+ years benefit most from depreciation deductions early in ownership. The tax benefits are received now (at current marginal rates) and the CGT cost is incurred at sale - a timing advantage that favours depreciation
• Depreciation in the year of sale: In the year you sell, you claim depreciation for the proportion of the year you owned the property for income-producing purposes. QS reports include pro-rata tables for partial-year claims

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