Depreciation 101: How to Maximise Tax Benefits on Investment Properties

Introduction

Did you know you could be missing out on thousands in tax deductions every year as a property investor?

One of the most overlooked tools in real estate investment is depreciation, a way to claim the gradual loss in value of your building and its fixtures over time. Unlike most property expenses, depreciation is a non-cash deduction, meaning you don’t need to spend anything to claim it.

For investors across Melbourne, especially those purchasing off-the-plan or new apartments, depreciation can be a powerful way to reduce taxable income and improve your overall return. Let’s break it down.

What Is Property Depreciation?

In simple terms, depreciation allows property investors to claim a tax deduction for the natural wear and tear that occurs to the building and its contents over time. There are two main categories you can claim:

• Capital Works (Division 43): This covers the structural elements of the building, such as walls, roofs, flooring and brickwork. You can typically claim these costs over 40 years from the time construction is completed.
• Plant and Equipment (Division 40): These are removable or mechanical items within the property, like carpets, ovens, air conditioners and blinds. Each of these has its own effective life and depreciation rate.

Newly built or off-the-plan properties offer the highest depreciation potential, as both categories can be claimed in full from the beginning.

How Does Depreciation Save You Money on Tax?

Depreciation works by reducing your taxable income, which in turn lowers the amount of tax you need to pay. It’s one of the most effective ways to boost your cash flow, without spending a cent.

For example:
If your investment property earns $30,000 in rental income annually and your total expenses (including depreciation) come to $35,000, your taxable income is reduced by $5,000. That means you only pay tax on what’s left after deducting allowable costs.

The key advantage? Depreciation is a non-cash deduction. You're not handing over any money, just recognising the declining value of your asset over time.

Who Is Eligible to Claim Depreciation?

Depreciation is available to property investors, not owner-occupiers. If you're renting out a property, you’re likely eligible to claim.

Here’s what you need to know:

• Capital works deductions apply to any residential property built after 16 September 1987
• Plant and equipment can only be claimed in full for brand-new or substantially renovated properties
• If you purchase a second-hand property after 9 May 2017, you may not be able to claim depreciation on existing plant and equipment. However, you can still claim capital works

If you’re unsure, your accountant or a qualified quantity surveyor can help confirm what you're entitled to.

Why Off-the-Plan Investors Have the Advantage

When you invest in a new or off-the-plan property, you’re in the best position to maximise depreciation. Every fixture, fitting and structural element is brand-new, so you can claim both capital works and plant and equipment from the moment your property is available to rent.

At Norus Projects, we’ve seen this benefit in action across our developments in Park View Burwood, Riverbend Ivanhoe, Sanctuary and Beach Point Sandringham. Investors in these projects can take full advantage of depreciation benefits from day one, improving cash flow and offsetting holding costs.

Builders often provide detailed specifications of included finishes, making it easier for your quantity surveyor to produce an accurate and maximised depreciation schedule.

How to Claim Depreciation

Getting started is easier than you might think. Just follow these steps:

1. Engage a qualified quantity surveyor to prepare a tax depreciation schedule.
2. The surveyor will assess your property and prepare a report outlining the yearly depreciation you can claim.
3. This is usually a one-off cost and can often be claimed as a tax deduction itself.
4. Pass the schedule on to your accountant.
5. They’ll include the depreciation in your annual tax return, so you claim the deduction every year.

A good depreciation schedule can remain valid for the entire claimable life of the property, often up to 40 years.

Common Mistakes to Avoid

While the process is straightforward, some investors still miss out due to these common pitfalls:

• Not claiming depreciation at all: Many new investors simply don’t realise they’re eligible.
• Assuming your accountant will handle it automatically: Your accountant needs a depreciation schedule to apply the deductions.
• Trying to estimate it yourself: You need a professionally prepared report from a registered quantity surveyor.
• Forgetting to update your schedule after renovations or improvements: New additions may also be claimable.

Avoiding these mistakes could save you thousands over the life of your investment.

Conclusion: Don’t Leave Money on the Table

Depreciation is one of the most effective and low-effort ways to improve your investment returns. If you’ve recently purchased or plan to invest in a new apartment, make sure you’re claiming every dollar you’re entitled to.

Want help estimating your depreciation potential? Get in touch with Norus Projects for a referral to a trusted quantity surveyor, or ask us about our current projects offering strong depreciation advantages in Melbourne’s most liveable suburbs.

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