Depreciation Calculator for Australian Property Investors

Depreciation is the decline in value of a building and its fittings as they age and wear out. The ATO lets you claim that decline as a tax deduction on an income-producing property, the same way a business depreciates its equipment. It is split into two parts: Division 43 for the building structure, and Division 40 for the plant and equipment inside it.

What makes it powerful is that it is a non-cash deduction. You are not writing a cheque for it each year, but it still reduces your taxable income, which means you pay less tax. For an investor, that lifts your after-tax return without you spending anything extra.

Division 43, capital works, covers the bricks and mortar: the building structure, plus permanently fixed items like the roof, walls and built-in joinery. For residential buildings constructed after 15 September 1987 it is claimed at a flat 2.5% of the construction cost each year, which spreads the deduction evenly across 40 years.

Division 40, plant and equipment, covers the removable and mechanical assets: carpet, blinds, the oven, the hot water system, air conditioning and so on. These have shorter effective lives and are usually claimed using the diminishing value method, so the deduction is largest in the early years and shrinks over time.

Since legislation that took effect from 1 July 2017, investors generally cannot claim Division 40 depreciation on previously used plant and equipment in a second-hand residential property they buy. In plain terms, if you purchase an established home, you usually cannot depreciate the existing carpet, blinds or appliances that came with it.

Division 43 building depreciation is not affected, so you can still claim the 2.5% capital works deduction on an eligible older building. New properties, and assets you buy and install yourself, are also treated differently. The rules are nuanced, so set the property type carefully in the calculator and confirm your eligibility with a qualified quantity surveyor or accountant.

Depreciation reduces your taxable rental income, so it feeds directly into your gearing position. A larger depreciation deduction increases your paper loss on a negatively geared property, which increases the tax you get back at your marginal rate, lowering your real holding cost.

One trade-off worth knowing: the building depreciation you claim under Division 43 reduces your cost base for capital gains tax, so it can lift the taxable gain when you eventually sell. That does not cancel out the benefit, since the deduction is worth more now than the deferred CGT, but it is part of the picture. As always these are estimates, and a quantity surveyor's schedule plus advice from your accountant will give you the figures you can actually lodge.