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Australia Rental Property Depreciation Guide

the rental property depreciation in Australia for the property investors. The guide covers: the capital works deductions (the "Division 43 — the structural improvements") — the "capital works deduction" at the "2.5% per year" (the "40-year effective life") on the "construction cost" of the building; the eligible buildings — the "residential rental property" constructed after the "15 September 1987"; the "construction cost" includes the "building cost" (the "the foundations, the walls, the roof, the floors, the windows, the doors, the plumbing, the wiring") and the "structural improvements" (the "the driveways, the fences, the retaining walls, the swimming pool, the tennis court"); the "capital works deduction" is available for the "40 years from the date of the construction completion"; the plant and equipment depreciation (the "Division 40 — the fixtures and the fittings") — the "plant and equipment" includes the "depreciable assets" within the property: (a) the "carpets and the floor coverings", (b) the "blinds and the curtains", (c) the "air conditioners and the heaters", (d) the "hot water systems", (e) the "kitchen appliances" (the "the ovens, the cooktops, the dishwashers, the rangehoods"), (f) the "bathroom fittings" (the "the exhaust fans, the mirrors, the shower screens"), (g) the "security systems and the smoke alarms", (h) the "pool equipment and the spa equipment", (i) the "solar panels and the battery systems"; the "plant and equipment" is depreciated at the "effective life" rates under the "diminishing value method" or the "prime cost method"; the quantity surveyor report (the "the professional depreciation schedule") — the "quantity surveyor" is the "qualified professional" who prepares the "depreciation schedule" for the rental property — the schedule itemises the "capital works cost" and the "plant and equipment assets" with the "effective life" and the "opening value"; the "depreciation schedule" costs the "$500 to $800" and is "tax deductible" in the "year of the preparation".

Capital Works Deductions in Detail

• Eligibility and the exclusions: The "capital works deduction" is available for the "residential rental property" (the "the building used for the residential accommodation"). The "commercial property" (the "the office, the shop, the warehouse") is eligible for the "2.5% or 4%" rate depending on the "use type". The "excluded properties" — the "property constructed before the 15 September 1987" (the "no capital works deduction"), the "land only" (the "no building"), the "property used for the personal purposes".
• Construction cost determination: The "construction cost" for the capital works deduction is the "actual cost of the construction" — not the "purchase price of the property". The "cost base" includes the "building contract cost" and the "architect and the engineering fees". The "purchase price apportionment" — when purchasing the established property, the buyer must "apportion the purchase price" between the "land value" and the "building value" (the "the building value is used for the capital works deduction").
• Claiming the capital works deduction after the purchase: The "new property" purchased from the "developer" — the "construction cost" is the "developer's cost" (the "provided by the developer or the quantity surveyor"). The "established property" — the "depreciation schedule" from the "quantity surveyor" estimates the "construction cost" based on the "property age, the size, the materials, the location". The "ATO guidelines" — the "ATO accepts the quantity surveyor estimates" as the "reasonable basis".

For the general rental property expenses and the deductions, see our Rental Property Expenses Guide →.

Plant and Equipment Depreciation Rules

• Pre-2017 properties: The "plant and equipment depreciation" for the "properties purchased before the 1 July 2017" — the investor can claim the "full depreciation" on the "existing plant and equipment assets" (the "the carpets, the blinds, the appliances" that were in the property at the "purchase date"). The "opening value" is based on the "proportion of the purchase price" allocated to the "plant and equipment".
• Post-2017 properties: The "plant and equipment depreciation" for the "properties purchased after the 1 July 2017" — the "new rules" (the "Treasury Laws Amendment (Housing Tax Integrity) Act 2017") limit the "plant and equipment claims" to the "new assets only". The investor can only claim the "depreciation" on the "new plant and equipment" (the "the assets that were not previously used in the income-producing activity"). The "second-hand assets" in the "established property" are "not depreciable".
• New assets and the replacements: The "new assets" (the "the newly purchased air conditioner, the new carpets, the new hot water system") are "fully depreciable" under the "post-2017 rules". The "replacements" (the "replacing the old carpet with the new carpet") are the "new assets" and are "depreciable". The "renovation" (the "the new kitchen, the new bathroom") adds the "new plant and equipment" that is "depreciable".

For the negative gearing and the rental property losses, see our Negative Gearing Guide →.

Depreciation Methods and the Calculations

• Diminishing value method: The "DV method" applies the "higher depreciation rate" in the "early years" — the "200% of the prime cost rate" for the "assets with the effective life of less than 5 years" (the "150% for the longer life"). The "DV formula" — the "asset value times the (days held divided by 365) times the (200% divided by the effective life)". The "DV method" is the "most common" for the "plant and equipment".
• Prime cost method: The "PC method" applies the "equal annual depreciation" over the "effective life". The "PC formula" — the "asset value times the (days held divided by 365) times the (100% divided by the effective life)". The "capital works deduction" (the "Division 43") uses the "prime cost method" at the "2.5% per year". The "PC method" is the "default method" for the "capital works".
• Low-cost and the low-value assets: The "low-cost asset" (the "costing less than $1,000") can be "pooled" in the "low-cost pool" and depreciated at the "18% in the first year" and the "30% in the subsequent years". The "low-value asset" (the "opening value below $1,000") can be "pooled" in the "low-value pool" and depreciated at the "37.5%". The "pooling" is the "simplified method" — the "individual asset tracking" is not required.

For the CGT on the sale of the rental property, see our Capital Gains Tax Guide →.