How does property tax depreciation work?


Property tax depreciation works by using your property’s decrease in value to lower your taxable income. It’s a useful way for property investors to save money over time. But knowing the ins and outs of property tax depreciation can be a bit tricky. Thankfully, RMA’s highly-skilled property agents are available to guide you through the process.


What is property tax depreciation?

Property tax depreciation is when you claim the depreciation in your property’s value against your taxable income. Broadly speaking, depreciation is the loss of value in an asset over time. In the context of property investment, this results from wear and tear to a home over time. What makes property depreciation useful is the fact that you can claim it against your taxable income. Investment properties are financial assets, so their decrease in value is considered negative income. This offsets the income it generates and brings you into a lower income tax bracket. Property tax depreciation amounts to significant savings over time.


What are the different types of deductions for property tax depreciation?

There are two main types of deductions to be aware of when it comes to property tax depreciation. These are capital works deductions, and plant and equipment deductions. Each of these involves different aspects of the property and is calculated in its own way.

Capital works deductions

Capital works deductions (commonly known as building write-offs) focus on the depreciation of the building’s structure. In addition to the building’s foundation, capital works deductions include doors, windows, driveways and fences. Some construction costs may also be claimed under capital work. In Australia, the structure of a residential building is considered to have an effective life of 40 years. This means you can make claims on capital works deductions for this length of time.

Plant and equipment deductions

The fixtures and fittings within an investment property are eligible for plant and equipment deductions. This includes things such as air conditioners and carpets, which are easy to remove. To be eligible for these deductions, the assets must depreciate at a faster rate than the building’s structure.


What is a tax depreciation schedule?

A tax depreciation schedule is a report that outlines the deductions you can claim on your investment. It lets you know what your deductions will look like throughout the useful life of your property. This is a valuable tool, as it allows you to plan out your income more effectively. To calculate a tax depreciation schedule for your property, you need three main pieces of information. These are the property’s value, its useful life and its salvage value. Salvage value refers to the projected cost of a property if it is sold after its useful life.


How to calculate property depreciation for taxes

There are two main methods available for calculating property depreciation for taxes. These are the prime cost and diminishing value methods. Understanding both approaches helps you figure out which one is right for you.

Prime cost

The prime cost depreciation method is more straightforward. This method uses a fixed rate of depreciation, meaning the same deduction is made every year. Given the consistent income this provides, low-income investors prefer this method. If they expect an income increase in the future, they can count on getting the same deductions.

Diminishing value

The diminishing value cost depreciation method is slightly more complex. It involves setting a higher rate of depreciation in the first few years. This rate decreases until the asset runs out of value. The diminishing value is preferable for investors that don’t plan to hold on to the property as long. It allows them to benefit more upfront and avoid losing value through inflation.


What are the advantages of property tax depreciation?

The main advantage of property tax depreciation is that it is a non-cash expense. This means that no cash or payment needs to be involved. Depreciation happens naturally, without requiring any extra work. To benefit from depreciation, homeowners only need to calculate it and make a claim. Talk to a highly-trained property manager from RMA if you need help with this.

RMA’s services

In addition to advice about tax depreciation, RMA provides a broad range of rental management services, including:


If you’re looking for help with property tax depreciation or any aspect of property investment, give us a call. Our experienced property agents will remove all the hassle for you.

RMA Rental Management Australia