Depreciation

Plain-English definition. Depreciation is the tax-deductible decline in value over time of a building's structure (capital works) and its plant-and-equipment items. For investors it is a non-cash deduction that reduces taxable income.

How it works in Australia. Two ATO regimes apply. Division 43 capital works allows 2.5% per year of construction cost over 40 years for residential buildings constructed after 17 July 1985. Division 40 plant and equipment covers depreciable assets — but since 9 May 2017, second-hand plant in established residential property cannot be depreciated by subsequent owners. New properties and renovations done by you are unaffected. A quantity surveyor's depreciation schedule (cost: $600–$800) is the ATO-recognised method for substantiating claims.

Concrete example. You buy a 5-year-old investment unit in 2026 for $620,000. The original construction cost (per the QS report) was $280,000. Capital works at 2.5% = $7,000/year claimable for the remaining 35 years. New plant items you install — a $4,000 dishwasher, $2,500 carpet — depreciate at effective-life rates. First-year deduction might total $9,200, saving a 37% marginal taxpayer about $3,400 in tax.

Common confusion. Depreciation reduces your CGT cost base on sale — claimed Division 43 amounts are added back to the gain. Many investors see depreciation as "free money" but it's really a deferral, not a saving (though the 50% CGT discount means there's still net benefit). Pre-2017 second-hand plant can't be claimed.