A tax depreciation schedule is a report that estimates how much of your rental property’s value you may be able to claim as a tax deduction each year, based on the wear and tear of the building and its fixtures.
For property investors, it turns an accounting concept most people have never heard of into real dollars back at tax time.
This article walks through what a tax depreciation schedule covers, why investors get one prepared, and how it can differ depending on whether a property is new or established.
As with anything tax related, this is general information only, so it is worth speaking with a qualified accountant about how depreciation applies to your own circumstances.
What Is a Tax Depreciation Schedule?
A tax depreciation schedule is a detailed report that estimates how much value a rental property loses each year through age and general wear.
This loss in value, often called decline in value, can typically be claimed as a deduction against the rental income the property earns.
The Australian Taxation Office allows investors to claim this decline in value under certain conditions, and the ATO sets out the broad rules for what can and cannot be claimed. A depreciation schedule translates those rules into a year by year breakdown specific to your property.
Rather than guessing at figures, investors use a professionally prepared schedule so their claims are backed by an itemised, defensible report.
The Two Components: Capital Works and Plant and Equipment
A tax depreciation schedule generally splits deductions into two broad categories, capital works and plant and equipment.
Capital Works
Capital works cover the structural elements of a property, things like the walls, roof, kitchen benchtops and built in cupboards. These deductions are usually spread out over many years, reflecting the long life of the building.
Plant and Equipment
Plant and equipment refers to the removable or mechanical items within a property, such as air conditioning units, hot water systems, carpets and blinds. These items generally wear out faster than the building, so they are treated differently and often written off over a shorter period.
Why Investors Get a Depreciation Schedule Prepared
Most investors have a tax depreciation schedule prepared by a qualified quantity surveyor, a professional trained to estimate construction costs and the value of individual assets in a property. This is one of the few professions recognised as suitably qualified for these cost estimates.
A quantity surveyor typically inspects the property, or reviews existing plans and cost records, then produces a report forecasting depreciation claims for many years ahead.
The schedule is usually a one off cost, and many investors find the deductions it unlocks are worth more than the fee, although results vary between properties.
New Builds vs Older Properties: How Depreciation Differs
How much you can claim often depends on the age of a property and, in some cases, when you purchased it. Newer properties generally offer higher depreciation claims, since more of the building’s original construction cost remains to be written off.
Older or established properties can still offer some depreciation, particularly where renovations have been carried out, but rules around claiming plant and equipment on secondhand assets have changed over the years.
Because these rules are updated from time to time, it pays to confirm the current position with your accountant rather than relying on outdated information.
Why a Depreciation Schedule Is Not Personalised Tax Advice
It is worth remembering that a tax depreciation schedule is not personalised tax advice. It is a report estimating available deductions, but how those deductions are applied to your tax return depends on your own circumstances.
How the property is owned, whether it is held jointly, and your overall income can all affect how deductions play out at tax time. This is why most investors hand their schedule to a registered accountant, who applies the figures correctly within current tax law.
Moneysmart has general information on working with financial and tax professionals if you need help finding the right adviser.
Depreciation and Capital Gains Tax When You Sell
Depreciation and capital gains tax are closely linked, and this is an area where investors can get caught out. When you sell an investment property, the capital works deductions you have claimed over the years may need to be factored into your capital gain calculation.
In broad terms, claiming depreciation can reduce the cost base of the property for capital gains tax purposes, which may increase the taxable gain when you sell.
The ATO’s capital gains tax guidance explains the general principles, but because every situation is different, this is a calculation your accountant should handle.
Questions to Ask a Quantity Surveyor or Accountant
Before committing to a tax depreciation schedule, it is worth asking a few questions to make sure you are working with a suitable professional.
- What experience do you have with properties similar to mine?
- Will you conduct a site inspection, or work from plans and cost records?
- How many years does the schedule cover?
- What happens if I renovate or add new assets later?
- How will this schedule affect my capital gains position when I sell?
- How should I use this alongside my accountant at tax time?
It also helps to ask whether the quantity surveyor is affiliated with a recognised professional body. Organisations such as the Real Estate Institute of Australia can be a useful starting point if you are building a broader team of trusted property professionals.
Conclusion
A tax depreciation schedule can be one of the more valuable tools in an investor’s tax toolkit, turning the everyday wear and tear on a rental property into a legitimate deduction.
Understanding the basics, from capital works and plant and equipment through to capital gains tax, helps you have a more informed conversation with the professionals preparing your claim.
Because every property and every investor’s circumstances are different, it is worth speaking with a quantity surveyor and a qualified accountant before relying on any depreciation figures, and if you have concerns about advice from a financial services provider, AFCA can help resolve disputes.
If you are still building your portfolio, browse seen.com.au for more articles, or explore apartments, townhouses and land estates across major Australian cities.
FAQs
1. Do I need a tax depreciation schedule for an older investment property?
You can still benefit from a schedule on an older property, particularly for capital works deductions on the original construction and any renovations.
Plant and equipment claims may be more limited, since rules around secondhand assets have changed over time. A quantity surveyor can assess your property and let you know what is likely to be worthwhile.
2. How much does a tax depreciation schedule cost?
The cost varies depending on the property type, location and the quantity surveyor you use, so it is best to request a quote directly. Many providers only charge a fee if they estimate the deductions will outweigh the cost. It is worth comparing a few providers and asking what is included.
3. Can I prepare my own depreciation schedule instead of hiring a quantity surveyor?
Property owners and real estate agents are generally not considered suitably qualified to estimate construction costs for tax purposes, unlike quantity surveyors.
Using an unqualified estimate can put your claim at risk if it is reviewed. A suitably qualified professional gives your deductions a stronger, more defensible basis.
4. Does a depreciation schedule need to be updated over time?
A schedule is usually prepared once and covers many years, but it may need updating if you renovate, add new assets or change how the property is used.
Some providers include updates in their original fee. Your accountant can advise whether an update is needed for a particular tax year.
5. How does depreciation affect capital gains tax when I sell my property?
Depreciation claimed on capital works can reduce the cost base of your property, which may increase the capital gain when you sell.
This is a complex area that depends on your individual circumstances and history of claims. It is best discussed with your accountant before you list the property for sale.