Investment Property Depreciation: The important things to know

If you want to maximise returns on your investment property, it’s vital to understand how depreciation works.

If you own or are interested in owning a rental property, you’re probably aware there are a bunch of related expenses you can claim as tax deductions – interest on your investment home loan, for example.

Another hefty deduction is depreciation.

You might be able to claim depreciation on the structure of your investment property, as well as fixtures and fittings.

Understanding depreciation and claiming all that you’re entitled to could save you thousands of dollars when tax time rolls around each year.

Depreciation on investment properties

As the structure of your investment property, along with it’s fixtures and fittings, depreciates, you can often deduct this ‘loss’ from your taxable income each year.

Depreciation refers to something that declines in value over its working life. If you’ve ever bought and sold a car, you’re probably familiar with this phenomeon.

In Australia, when you use a depreciating asset to produce income, you can make an annual tax deduction for it’s declining value.

For example, if you buy a company car to help you run your business, you generally can’t claim the cost as an instant tax write off. Instead, you claim it over time as the value of the vehicle depreciates. You’ll presumably be using the car to generate income for several years, after all, so it makes sense that the expense is also spread over time. At least, that’s how the ATO sees it.

The same principle applies to your investment property. There are two main categories that you might be able to make a deduction for depreciation each year that the property is tenanted or ‘genuinely available’ to rent:

Capital works deductions

Property investors can claim ‘capital works deductions’ for depreciation on the structure of the property itself.

That means that the declining value of renovations you do, as well that of any repairs, can be claimed as a capital works deduction over time. Capital works deductions are generally claimed over 40 years from the date construction finished, so 2.5% of the cost each year.

If the property you’re buying or own was built after 17 July 1985, you could also claim a deduction for the building costs, even if you’re buying as is. That doesn’t mean you can simply claim the whole purchase price of the property – just the cost of constructing it.

Depreciating assets

You can also claim depreciation on ‘plant’ assets that aren’t part of the structure of the building. A dishwasher, ceiling fans, and air-conditioning units are just a few examples of plant assets.

The ATO has a guide for the ‘effective life’ of different items. A dishwasher, for example, has an effective life of 10 years, so you can claim depreciation over the decade following the purchase.

Since 2017, you can only claim depreciation on plant items that you purchased new and that haven’t been used before.

If the asset cost you less than $300, you can claim it as an instant write off, but anything more expensive needs to be claimed over time.

How to claim depreciation on an investment property

Calculating depreciation on capital works

Capital works deductions include the cost of constructing the property (providing it was completed after 1985), as well as any expenses you incur making renovations, repairs or other improvements. There are some exceptions – land isn’t considered a depreciating asset, so you can’t claim the cost of landscaping or gardening, for instance.

For construction costs that you incurred, you would claim 2.5% each year for 40 years, providing the property is rented or genuinely available for rent.

If you bought the property as is, you’ll need to work out what the construction costs you can claim were at the time you bought it.

For example, say you buy a property in 2024 for $400,000, and that property was built in 2004. You might hire a surveyor, who could estimate that the construction cost would have been roughly $200,000. That means you would be able to make a claim of $5,000 (2.5% of $200,000) for each year the property is available for rent. If the property was only available for rent for a certain portion of a year, say 50%, you would only be able to claim $2,500.

To claim a capital works deduction on a property you brought, you’ll generally need the following information:

• When the property was built and the dates that construction commenced and finished
• Who built it
• The type of construction
• Evidence that the property was rented or available to rent for the year being claimed

Working out the construction costs can be pretty complicated, so it’s often worth enlisting a quantity surveyor who is qualified to estimate.

Calculating depreciation on assets

Depreciation of assets like dishwashers or air conditioners can be claimed using either the prime cost or diminishing value method.

Both methods allow you to claim the entire cost of eligible assets over the course of it’s effective life, but the diminishing value method means claiming more at the start, whereas prime cost means claiming the same amount each year.

For example, let’s say you buy a $2,000 ventilator fan for the property, which has a working life of 20 years, as per the ATO. Using the prime cost method, you would deduct 5% of the initial cost ($100) each year for 20 years. Using diminishing value method, though, you would deduct 10% in the first year ($200). The next year, you deduct 10% of the assets current value, factoring in depreciation ($180) and so on.

Depreciation schedule

A quantity surveyor can do up a depreciation schedule for your investment property and related assets and lay out exactly how much you can claim each financial year.

Hiring a professional can ensure you aren’t missing out on any deductions and help maximise your return.

A quantity surveyor will be able to estimate your capital works deductions, as well as help with the number-crunching for your various plant items.

Check out this illustrative example of what a depreciation schedule could look like, assuming:

• Capital works depreciation is calculated as 2.5% of the building structure cost ($382,500), which amounts to $9,563 annually.
• Plant & equipment depreciation is calculated using the diminishing value method, whereby 10% of the initial plant & equipment cost ($67,500) in the first year, then the balance is reduced over the following 40 years.

Important questions before you upsize your home

 Denise Raward

Updated on 3 Jun 2025

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For many Australians, their first home isn’t their forever home. As families grow, many look to move to larger properties for extra space – but upsizing may not be the right move for everyone.ON THIS PAGEWhy upsize your home?Can you afford to upsize your home?Choosing the right propertyUpgrading your home? Don’t forget to upgrade your mortgageCalculating other costs of upgrading a homeFinancial strategy for upgrading: What you need to know

For many Australians, their first home isn’t their forever home. As families grow, many look to move to larger properties for extra space – but upsizing may not be the right move for everyone.

Why upsize your home?

If you’re looking to buy a larger home, the first question you need to ask yourself is why. Is it because you’ve added a child or two and need extra rooms, perhaps a yard, and more storage?

If you don’t have extra or growing children, maybe you’re planning to have them? Or have you always pictured yourself in a larger home?

Some upsizers assume a larger home will build more wealth in the future which can sometimes be the case, but not always.

Be clear on exactly what you’re wanting to achieve before you start looking for another home. Knowing your reason for moving will help you determine whether buying a larger home is a sound move for your circumstances.

In most cases, a larger home will mean a larger mortgage and if you have young children – or may be about to have them, those two things may not be compatible.

Can you afford to upsize your home?

This leads us to the important question of how much extra a larger home will cost you, particularly if you’ll need to increase the size of your home loan to purchase it.

You’ll also want to consider whether you need to sell your current home to fund a larger one. If you do, you’ll want to know how much equity you have in your current property, and how much of that can be put towards your new home.

If you’re planning to start (or add to) a family, you’ll need to take periods of reduced income during parental leave into consideration, as well as the possibility that at least one parent may not return to full-time work – at least while children are young.

Ask yourself how much of your income will need to be directed to the asset you’re living in. Too large a portion may put you under financial strain when you can least afford it, even if it may pay dividends when you eventually sell the property (if you do).

Our borrowing power calculator can help you assess where you stand with your finances, how much you may be able to borrow, and what monthly home loan repayments you may be up for.

Choosing the right property

If you’re a savvy homebuyer, you may think buying a property with an eye on renting it out in the future will get you the most out of your purchase.

However, good family homes don’t always make good investments. For those buying a home to live in, future capital growth typically sits lower on the list of priorities, below amenity and family needs.

Your list of requirements for a larger home may be more concerned with the number of bedrooms, proximity to good schools, outdoor play areas, and health facilities. If it’s space you’re after, you might also have to move to a less desirable location where property prices may not grow at the same rate as in more in-demand areas (but not always).

Upgrading your home? Don’t forget to upgrade your mortgage

Buying a larger, fancier, or generally more expensive home will likely also mean taking out a more sizeable mortgage.

Arranging a larger mortgage will follow the same process as taking out your existing mortgage (assuming you have one). However, your borrowing capacity (and therefore the risk you present to a lender) will need to be re-assessed, particularly if you’re looking at a loan-to-value ratio (LVR) of 80% or more.

Your record as a borrower will unquestionably affect your success as an upgrader.

Another key to upsizing is ensuring you’re not overstretching yourself and can meet higher home loan repayments alongside your other expenses. These might have grown alongside your family – at least in the eyes of your lender.

Also, beware of having an inflated view of the value of your existing home before you set out to upgrade. It’s wise to arrange a market appraisal with a local real estate agent although an official property valuation will likely give you a more accurate picture.

Calculating other costs of upgrading a home

Beyond mortgage repayments, other expenses associated with owning a home are usually higher for those who own larger properties. You’ll likely face higher utility bills, increased council rates, and considerably more maintenance costs.

There’ll also be the increased cost of stamp duty on a more expensive property. And when it’s not your first home, you can forget any first home buyer concessions or grants you may have previously received.

Then there are other expenses, including:

• Moving costs
• Costs to kick start your power, internet, etc.
• Possibly more lenders mortgage insurance (LMI)
• New furniture and fittings to fill the additional space

See also: How much does it cost to buy a house?

Financial strategy for upgrading: What you need to know

What happens to your home loan?

If you manage to buy and sell at the same time, the proceeds from your sale will likely make up part of what you pay for the new property. The rest will need to come from a lender.

See also: What to expect on settlement day

If you’re happy with your current loan and your lender offers a portability feature – allowing you to transfer your existing mortgage to another home – you can continue on the same home loan, perhaps topping it up in the meantime.

This strategy may also save you money on establishment fees and other home loan costs.

Can you take out a new mortgage?

Buying a new home can also be an opportunity to reassess the home loan market and see if you can secure a lower interest rate or better terms and conditions than your previous home loan.

While you may start by asking your existing lender what it can offer you, make sure you shop around too. Home loan products, rates, and features change all the time and some may offer competitive rates, special offer deals, or more attractive terms and conditions.

A mortgage broker can help you navigate the market if you’re feeling overwhelmed. Ideally, they should be able to match you with a home loan best suited to your needs.

See also: Things to ask your mortgage broker, and why

To kick you off, the table below features some of the lowest interest rate home loans currently available on the market: