Most investors know depreciation is a tax deduction. Fewer know how large the gap between property types really is, and how a single purchasing decision can swing thousands of dollars a year in claimable deductions.
The figures above come from BMT Tax Depreciation data tracking average first full-year depreciation claims across Australian residential investment properties. New houses averaged $20,723. Established houses averaged $6,281. New townhouses averaged $18,957. Established townhouses averaged $8,125. These are averages across a portfolio of real schedules, not theoretical maximums.
Why two properties can produce such different deductions
Australian tax law splits property depreciation into two categories. Capital works deductions (Division 43) are claimable on the building's structure and assets permanently fixed to the property. Plant and equipment depreciation (Division 40) is claimable on assets which are easily removable from the property or mechanical in nature. Think carpets, blinds, ovens, air conditioners, and hot water systems.
Capital works deductions are typically claimed at a rate of 2.5 per cent over the life of the property (forty years) from the construction completion date. A newer build has a higher construction cost base, so the annual Division 43 claim is higher in dollar terms. Construction costs generally increase over time, making capital works deductions on new buildings higher.
The bigger swing comes from Division 40. After the 2017 legislation changes, owners of second-hand properties could no longer claim deductions for existing plant and equipment assets. This does not mean plant and equipment assets in established properties cannot be claimed at all, but they must be brand new. For instance, if a new dishwasher is installed while the property is income-producing, the owner can claim this as a new asset.
New properties generally contain higher depreciation deductions than established ones because they are not affected by the 2017 legislation changes, and their owners are eligible to claim plant and equipment assets.
Per the ATO (ato.gov.au), investors can use either the diminishing value or prime cost method to calculate plant and equipment deductions. The diminishing value method front-loads deductions into the early years of ownership, which is why year-one figures for new properties look particularly strong.
What this means in practice: the trade-offs
Higher depreciation deductions reduce taxable income in the years they are claimed. For a PAYG investor on a 37% marginal rate, an extra $14,000 in deductions (the rough gap between a new house and an established one, based on the figures above) translates to roughly $5,180 less tax in year one. That is a real cash flow difference, not a theoretical one.
That said, there are genuine trade-offs to weigh.
- Purchase price and build quality. New properties often carry a higher purchase price than comparable established ones in the same suburb. The depreciation benefit does not automatically offset a premium purchase price. An independent valuation and rental appraisal matter here.
- Vacancy and rental income. A newly built property in a developing suburb may face a different rental market than an established property near existing infrastructure. Realistic rental yields, vacancy assumptions, and independent rental appraisals should inform any comparison, not the depreciation schedule alone.
- The deduction tapers. The Division 43 deduction runs at 2.5% per year for 40 years, but Division 40 (plant and equipment) declines each year as assets age. The first-year figure is the high point; years two through five drop, sometimes significantly, particularly on the plant and equipment side.
- Established properties still claim something. Capital works deductions are not affected by the 2017 legislation changes and typically make up 85 to 90 per cent of a total depreciation claim. BMT data shows properties affected by the 2017 legislation changes still claimed an average of $6,249 in first full-year depreciation deductions in financial year 2021/22. An older property is not a write-off from a depreciation perspective.
- SMSF investors: different rules apply. Inside a self-managed super fund, depreciation deductions reduce the fund's taxable income, which is already taxed at 15% in accumulation phase and 0% in pension phase up to the Transfer Balance Cap. The tax saving per dollar of deduction is smaller than for a high-income individual investor. That does not make depreciation irrelevant inside an SMSF, but it changes the maths. Discuss the implications with an SMSF specialist accountant.
A worked example: two investors, same suburb
Consider two investors each buying a residential investment property for $750,000 in the same suburb.
Investor A buys a newly completed house. Based on industry averages consistent with the BMT data referenced above, a quantity surveyor finds approximately $20,000 in first-year depreciation deductions: around $14,000 in Division 43 (construction cost base around $560,000 at 2.5%) and approximately $6,000 in Division 40 on new plant and equipment using the diminishing value method.
Investor B buys a 1998-built house for the same price. Division 43 still applies because the building was constructed after 1987, but the construction cost base is lower and the building is already 27 years into its 40-year schedule. Division 40 on pre-existing items is blocked by the 2017 rule. A quantity surveyor finds approximately $6,000 in first-year deductions, almost entirely from residual Division 43 entitlement.
On a 37% marginal rate, Investor A's deductions save roughly $7,400 in tax in year one. Investor B's save roughly $2,220. The after-tax cash flow difference is around $5,180 per year, before any difference in rental income, purchase costs, or financing.
These figures are illustrative. Your actual result depends on construction cost, property specifications, method chosen (diminishing value or prime cost), and your marginal tax rate. The ATO states in taxation ruling 97/25 that quantity surveyors are one of the only recognised professions with the appropriate construction costing skills to estimate construction costs for depreciation purposes. A registered quantity surveyor's schedule is what the ATO expects to see.
What to do next
If depreciation is a material factor in your property decision, here are three concrete steps.
- Get a depreciation estimate before you commit. Most quantity surveyor firms will provide a free pre-purchase estimate. That number should sit alongside your rental appraisal and finance modelling, not replace either of them. A quantity surveyor can prepare a report at the time a rental property is purchased. Look for a firm that is a member of the Australian Institute of Quantity Surveyors (AIQS) and registered with the Tax Practitioners Board.
- Model the after-tax position with your accountant. The raw depreciation figure only tells part of the story. Your marginal rate, existing property portfolio, and whether you hold inside or outside super all affect the outcome. An accountant familiar with investment property, or an SMSF specialist accountant if the fund is involved, can run the numbers for your specific situation.
- Talk through the finance and property structure with a licensed broker. Whether you are buying as an individual, in joint names, or through an SMSF unit trust structure, the entity you buy in affects everything from borrowing capacity to how depreciation flows through. A licensed broker and a property specialist can help you understand what structure suits your circumstances before you sign anything.
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General information only, not personal financial advice. Speak with a licensed adviser before acting.