Rental Property Depreciation

A non-cash tax deduction that accounts for the wear and tear of a rental property's building and fixtures over time, reducing your taxable rental income without an actual cash outflow.

Depreciation splits into two categories:

• Division 40 (plant and equipment) - removable items like appliances, carpets, blinds and hot water systems. If you buy a second-hand property, you can only depreciate items you personally install afterwards, not what was already there - this rule stops the same item being depreciated twice by different owners. New properties aren't affected by this restriction.
• Division 43 (capital works) - the building's structure itself (walls, roof, foundations) and any permanent improvements. Claimed at a fixed 2.5% of the original construction cost per year, for 40 years, and available on second-hand properties too. Renovations get their own separate 40-year claim from the date they're completed. Since the deduction is based on original construction cost rather than purchase price, most investors use a quantity surveyor to prepare a depreciation schedule.

One catch: Division 43 deductions reduce your property's Cost Base, increasing your capital gain when you sell. Division 40 doesn't have this clawback.