Depreciation is one of the most valuable and most underused tax deductions available to Australian property investors. Most investors know it exists. Far fewer understand exactly how it works, what they can claim, and how much it is actually worth over time. Here is a clear breakdown of investment property depreciation, how to calculate it, and how to make sure you are not leaving money on the table.
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Depreciation is the decline in value of an asset over time due to wear and tear. The ATO allows property investors to claim this decline as a tax deduction, even though no cash actually leaves your pocket.
This makes depreciation one of the most powerful deductions available. It reduces your taxable income without requiring any additional spending.
There are two types of depreciation available to investment property owners in Australia.
New properties
Investors purchasing new builds, house and land packages, or off-the-plan apartments can claim both Division 43 and Division 40 depreciation in full.
Established properties purchased after 9 May 2017
Division 40 plant and equipment depreciation is no longer available on existing items in second-hand residential properties. Any new items installed after settlement remain fully depreciable. Division 43 capital works deductions are still available provided the building was constructed after 15 September 1987.
Commercial property
The 2017 changes do not apply to commercial property. Both Division 43 and Division 40 remain fully claimable regardless of when the property was built or purchased.
The amount varies significantly depending on the property type, age, and the assets within it. As a general guide:
At a marginal tax rate of 37%, a $10,000 depreciation deduction saves approximately $3,700 in tax in a single year. Over a 10-year hold period, that compounds into a meaningful improvement in the after-tax cash flow position of any investment property.
Step 1: Purchase your investment property
Once settlement is complete, you are eligible to commission a depreciation schedule. The sooner you do this after purchase, the sooner you can start claiming.
Step 2: Engage a registered quantity surveyor
Only a registered quantity surveyor can prepare a tax depreciation schedule. Your accountant cannot do this on your behalf. The surveyor will inspect the property and identify every depreciable asset.
Step 3: Receive your depreciation schedule
The surveyor prepares a detailed report listing every depreciable item, its ATO-approved depreciation rate, and the annual deduction available over the life of the property. The schedule costs typically between $500 and $800 and is itself tax deductible.
Step 4: Provide the schedule to your accountant
Hand the schedule to your accountant alongside your rental income and expense records each financial year. They will apply the relevant deductions in your tax return.
Step 5: Claim year after year
The schedule is a one-off document used every year for the life of the property. If you renovate or install new items, update the schedule to capture the additional deductions.
When claiming plant and equipment depreciation, investors can choose between two calculation methods.
Prime cost method
Depreciates the asset at a fixed percentage of its original cost each year. Produces equal deductions over the life of the asset.
Diminishing value method
Depreciates the asset at a higher rate in the early years, with the deduction reducing over time as the asset's value falls. This method produces larger deductions in the first few years of ownership, which is typically more beneficial for investors focused on improving early cash flow.
Most investors use the diminishing value method for plant and equipment because the larger upfront deductions improve the cash flow position in the years when holding costs are typically highest.
Here is how depreciation affects the cash flow position of a real investment property.
Property: New two-bedroom apartment, purchased for $650,000
At a 37% marginal tax rate, this produces a tax saving of approximately $5,439 in year one alone. That is $5,439 that stays in the investor's pocket, improving the effective cash flow position of the property without any additional expenditure.
Over a 10-year hold period with diminishing Division 40 deductions but stable Division 43 claims, the total tax saving from depreciation alone can exceed $40,000 to $50,000.
The 2026 federal budget changes to negative gearing affect how depreciation deductions are used for new established property purchases after 12 May 2026. Depreciation still applies but the deductions carry forward against future property income rather than being offset against wages immediately.
For new builds, depreciation continues to be fully deductible in the year it is claimed under the retained negative gearing rules.
For a full breakdown of the 2026 budget changes and what they mean for your investment strategy, check out this blog what does the 2026 federal budget mean for prices and rents.
At Search Property, we help Australians cut through the noise and build data-driven investment strategies aligned with long-term wealth goals. Our buyers agents have helped thousands of clients build wealth through property because we focus on fundamentals, not headlines.
Book a FREE investment assessment call with Search Property. We'll discuss your goals and position, and help you build a clear plan to move forward with confidence.
Disclaimer: Search Property Pty Ltd (SP) does not provide financial or investment advice and does not hold a financial services license as defined in the Corporations Act 2001 (Cth). Any advice given by SP is general in nature and does not take into account your personal circumstances or objectives, financial situation or needs.
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