Understanding House Depreciation: A Guide for Australian Property Owners

When investing in property, most Australians focus on location, market trends, and rental yields. However, one often overlooked yet valuable aspect of property investment is house depreciation. Understanding how depreciation works can help property investors maximise their tax benefits and increase overall returns.

This guide explores what house depreciation is, why it matters, and how you can benefit from it.

What Is House Depreciation?

House depreciation refers to the natural wear and tear that occurs in a property over time. Just like a car loses value as it ages, properties also experience depreciation, which can be claimed as a tax deduction by property investors.

In Australia, the Australian Taxation Office (ATO) allows investors to claim depreciation under two main categories:

Capital Works Deductions (Division 43) – This covers the structural elements of the property, including walls, floors, roofs, and built-in fixtures such as kitchen cabinets and bathroom fittings.

Plant and Equipment Deductions (Division 40) – This relates to removable assets like carpets, blinds, air conditioning units, and appliances.

By claiming these deductions, property owners can reduce their taxable income, resulting in significant tax savings.

How Does House Depreciation Work?

House depreciation is calculated based on the property’s age, construction costs, and the value of depreciable assets. A professional quantity surveyor assesses these factors and prepares a depreciation schedule, which outlines the deductions an investor can claim each year.

There are two methods used to calculate depreciation:

Prime Cost Method – This method spreads depreciation evenly over the asset’s effective life.

Diminishing Value Method – This method applies a higher depreciation rate in the earlier years, providing greater deductions sooner.

The best method to use depends on the investor’s financial strategy and tax goals. Many investors prefer the diminishing value method to maximise deductions in the early years of ownership.

The Benefits of Claiming House Depreciation

1. Maximised Tax Savings

One of the most significant advantages of claiming depreciation is reducing taxable income. By lowering the amount of tax you need to pay, you can improve your cash flow and reinvest in your portfolio.

2. Increased Rental Yield

Depreciation deductions effectively put more money back into your pocket, allowing you to maintain and improve your property, potentially increasing its rental value.

3. Offsetting Other Costs

Owning an investment property comes with various expenses, including mortgage repayments, maintenance, and management fees. Depreciation can help offset these costs, making property investment more financially manageable.

4. Enhancing Long-Term Investment Returns

Claiming depreciation enables investors to increase the profitability of their properties, making it easier to grow their portfolio over time.

Who Can Claim House Depreciation?

Not all property owners are eligible to claim depreciation. The eligibility criteria depend on several factors, including:

Property Type – New properties tend to attract higher depreciation claims compared to older properties. However, investors who renovate older properties can still claim depreciation on new additions.

Ownership Structure – Investors who own rental properties (whether individually or through a trust, partnership, or company) can claim depreciation, but owner-occupiers cannot.

Construction Date – Capital works deductions are only available for residential properties built after 16 September 1987. However, plant and equipment deductions can still apply to certain assets in older homes.

A qualified quantity surveyor can assess your property and confirm whether you are eligible for depreciation benefits.

When Should You Get a Depreciation Schedule?

A depreciation schedule is essential for claiming deductions correctly. It’s best to organise a schedule as soon as you purchase an investment property or complete renovations. A professional quantity surveyor can prepare a detailed report outlining:

• The property’s construction cost

• A breakdown of eligible depreciation claims

• The optimal depreciation method to use

This schedule ensures you claim the maximum deductions allowed by the ATO while remaining compliant with tax regulations.

Common Misconceptions About House Depreciation

1. My Accountant Can Calculate Depreciation

While accountants handle tax matters, only registered quantity surveyors have the qualifications to estimate construction costs and depreciation values accurately.

2. Older Properties Don't Qualify for Depreciation

Even though capital works deductions may not be available for very old properties, plant and equipment deductions can still be claimed, especially if renovations have been undertaken.

3. Depreciation Isn’t Worth the Effort

Some investors assume depreciation claims are too complex or insignificant. However, with a professional depreciation schedule, the process is straightforward and can result in thousands of dollars in tax savings annually.

Final Thoughts

House depreciation is a powerful tool that many Australian property investors overlook. By understanding how it works and ensuring you have a professional depreciation schedule, you can take full advantage of the tax benefits available to you.

If you're looking to maximise your investment property’s potential, consulting with a trusted quantity surveyor like Washington Brown can help you unlock significant tax savings and improve your long-term financial success.