Investment Property Depreciation and Tax in Australia: A Landlord Guide

Depreciation lets rental property owners claim the decline in value of a building and its fixtures against rental income. There are two parts: capital works deductions for the building itself, generally 2.5% a year over 40 years, and deductions for depreciating assets such as appliances and carpets. Since 1 July 2017, most owners cannot claim depreciation on second-hand assets that were already in a residential property when they bought it (ATO capital works; ATO second-hand assets).

This guide is general information, not tax advice. Rules depend on your circumstances, so confirm everything with your accountant or registered tax agent.

What is investment property depreciation?

Depreciation is a tax deduction for the wear and tear of an income-producing property over time. You do not spend money each year to claim it; it reflects the cost of the building and its assets spread over their useful lives, which is why it can make a real difference to after-tax returns.

How do capital works deductions work?

Capital works deductions cover the construction cost of the building and structural improvements, such as a new bathroom or extension. The ATO rate for residential construction is generally 2.5% a year for 40 years from completion, and the eligible amount is based on construction cost, not purchase price (ATO). Older properties may have little or no capital works value left, depending on when they were built.

Can you claim depreciation on second-hand assets?

In most cases, no. The ATO says you generally cannot claim a deduction for second-hand depreciating assets in a residential rental property after 1 July 2017 (ATO). That usually means owners of established properties can claim the building’s capital works and any new assets they buy themselves, but not the fittings that came with the home. There are exceptions, so ask your accountant how they apply to you.

Do you need a depreciation schedule?

A depreciation schedule, prepared by a qualified quantity surveyor, sets out what you can claim each year. It is most valuable on newer properties, recent renovations and new builds. Your agent and accountant cannot prepare one; the quantity surveyor estimates construction costs where records are missing. The fee for preparing it is itself generally deductible; check with your accountant.

What other rental property expenses can you claim?

Common deductible expenses include property management fees, advertising for tenants, council rates, water charges you pay, landlord insurance, strata levies, repairs and maintenance, and interest on the loan used to buy the property (ATO rental properties). Repairs that restore something are treated differently from improvements, which are usually capital works.

What records should landlords keep?

• purchase and settlement documents, and all costs of buying
• monthly and annual statements from your property manager
• invoices for every repair, improvement and purchase
• loan statements, insurance policies, rates and strata notices
• your depreciation schedule

Good records also matter when you sell, because they help your accountant work out capital gains tax (ATO CGT).

How does property management help at tax time?

We give every owner itemised monthly statements and an annual income and expense summary, so your accountant has a clean, complete year in one document. Our management fees, set out on our fee schedule, appear on those statements too.

Frequently asked questions

What depreciation rate applies to rental buildings?

Capital works deductions are generally 2.5% a year for 40 years from completion of construction. Check eligibility with your accountant.

Can I claim depreciation on an established house?

Usually you can claim capital works on the building and depreciation on new assets you buy, but not on second-hand assets that came with the property after 1 July 2017.

Who prepares a depreciation schedule?

A qualified quantity surveyor. Your property manager and accountant use the schedule but do not prepare it.

Is property management tax deductible?

Property management fees for an income-producing rental property are generally deductible. Confirm with your accountant.