what is Depreciation –
and why is it important on a brand new investment property
Depreciation is one of the most powerful tax benefits available to Australian property investors. If you’ve purchased a brand-new investment property or a house and land package, you can claim thousands of dollars in tax deductions each year—boosting your cash flow and improving your long-term returns.
According to BMT Tax Depreciation, the average first-year depreciation deduction for a new house is between $9,000 and $12,000. That’s real money back in your pocket, helping you offset holding costs, reduce tax, and reinvest in your portfolio.
But how does depreciation work? What can you claim? And how do you maximise your deductions? Let’s break it down.
What Is Depreciation on an investment property?
Property depreciation allows investors to claim a tax deduction for the wear and tear of their investment property over time. This means you can reduce your taxable income—legally—while your property potentially increases in value.
For brand-new properties, the benefits are even greater. You can claim the full value of both the building and its fixtures, whereas investors who buy second-hand properties are restricted under current ATO rules.
Depreciation is explained by MGS Quantity Surveyors as:
“Tax depreciation on a residential or commercial investment property is a deduction against assessable income allowing the owner to reduce the amount of taxation payable. The deduction is based on the depreciating value of the property asset.
An investor is able to claim for two distinct types of depreciation on buildings, which are explained below.
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what is Depreciation that can Investors Claim
Depreciation is divided into two categories:
1. Capital worapital Works Deductions (Division 43) –
The Building Structure
Works deductions allow you to claim depreciation on the actual structure of the building and any permanently fixed assets. This includes:
- The building’s foundation, walls, roof, and floors
- Built-in cabinetry such as kitchen cupboards and wardrobes
- Doors, windows, and bathroom fittings
- Driveways, fences, and retaining walls
For brand-new residential investment properties, the capital works deduction rate is 2.5% per year for 40 years from the date of construction.
For example, if the construction cost of your new build is $300,000, you can claim $7,500 per year ($300,000 × 2.5%) in depreciation deductions—a total of $75,000 over the life of the property.
2. Plant and Equipment Depreciation (Division 40) – Fixtures and Fittings
Plant and equipment depreciation covers removable assets within the property, including:
- Appliances: Ovens, dishwashers, and cooktops
- Flooring: Carpets, floating floorboards, and vinyl
- Blinds, curtains, and air conditioning units
- Hot water systems and ceiling fans
- Smoke alarms and security systems
Each item has an effective life set by the ATO, and depreciation can be claimed using either the diminishing value method (higher upfront deductions) or the prime cost method (equal deductions each year).
What is depreciation on Brand-New Properties –
why do they Have the Best Depreciation Benefits
For properties purchased after May 9, 2017, second-hand investors cannot claim depreciation on existing plant and equipment assets. However, brand-new properties are exempt from this rule, meaning investors can claim the full depreciation on fixtures and fittings.
If you’re choosing between a new build or an established property, this could mean the difference between thousands of dollars in lost deductions over time.
what is Depreciation on House & Land Packages:
If you’re purchasing a house and land package, certain costs incurred during construction can be leveraged for depreciation or added to your cost base for future capital gains tax (CGT) purposes.
Depreciation on Construction and Development Costs
The costs associated with building the home are fully claimable under capital works deductions, including:
- Site preparation and excavation
- Construction costs (labour and materials)
- Professional fees (architects, surveyors, engineers)
Landscaping and External Works
- Hard landscaping (driveways, retaining walls, fences) can be claimed under capital works deductions.
- Soft landscaping (grass, plants, soil) is not depreciable.
Loan and Holding Costs That Can Reduce Your Capital Gains Tax
Certain costs can’t be claimed as an immediate tax deduction but can be added to your cost base for capital gains tax (CGT) purposes when you sell. These include:
- Stamp duty on the land purchase
- Legal and conveyancing fees
- Council and utility connection fees
- Interest on your construction loan (during the build phase)
By increasing your cost base, these expenses reduce your capital gain when you eventually sell the property, lowering your CGT liability. More information about Capital Gains Tax can be found here on the ATO Website: CLICK HERE
Expert Insights on Depreciation from Mike Mortlock
Mike Mortlock, Managing Director of MCG Quantity Surveyors, highlights how depreciation can transform an investor’s cash flow:
“For some investors, those tax savings could mean the difference between a cash-positive and a cash-negative investment.”
(CLICK HERE for an explanation of Cashflow Positive properties)
He also stresses the importance of a professional depreciation schedule:
“Depreciation schedules provide the roadmap to accessing these deductions. Without one, you’re leaving money on the table.”
For investors worried about legislative changes, Mortlock reassures that depreciation remains a significant benefit:
“While the new rules do restrict depreciation claims for some investors, they don’t remove them altogether. Capital works deductions are still available, and in some cases, they can be quite substantial.”
Source: MGS Quantity Surveyors
How to Maximise Your Depreciation Deductions
1. Get a Professional Tax Depreciation Schedule
A tax depreciation schedule from a qualified quantity surveyor ensures you claim every possible deduction. The ATO recognises quantity surveyors as the experts in estimating construction and depreciation costs.
A depreciation schedule provides:
- A detailed breakdown of claimable depreciation items
- A year-by-year forecast of deductions
- ATO-compliant reports for your accountant
The cost of a depreciation schedule (typically $600–$800) is tax-deductible, making it an essential tool for any investor.
2. Work With Experts Who Understand Depreciation
Your property advisor, accountant, and quantity surveyor should work together to ensure you’re maximising depreciation benefits while staying compliant with tax laws.
How Prospa Property Advisory Can Help You Maximise Depreciation Benefits
At Prospa Property Advisory, we don’t just help you find the perfect investment property—we ensure you’re set up for long-term success. When we source brand-new properties for our clients, we focus on maximising depreciation benefits so you can boost your cash flow and reduce your taxable income.
Our team works with trusted quantity surveyors to ensure you receive a comprehensive tax depreciation schedule, allowing you to claim every deduction you’re entitled to. Whether you’re purchasing a new build or a house and land package, we guide you through the process, helping you take full advantage of tax-saving opportunities.
Want to maximise your investment returns? Get in touch with Prospa Property Advisory today and let us help you build a profitable property portfolio with smart tax strategies. Contact us now to learn more!
