Why depreciation deserves a closer look from property investors

For many property investors, a depreciation schedule has traditionally been something considered after settlement, often once the property is tenanted and tax time begins to approach.

However, with the tax treatment of residential investment property changing, depreciation warrants closer attention.

From the 2027–28 financial year, negative gearing will generally be limited to qualifying new residential properties. Properties held before 7.30 pm AEST on 12 May 2026 remain subject to the existing arrangements, while losses on established residential properties acquired after that time will generally no longer be able to be offset against unrelated income such as salary and wages.

Instead, eligible losses may be applied against other residential property income, with unused amounts potentially carried forward.

These changes do not make depreciation less relevant, rather, they place greater importance on understanding the deductions associated with a property, how they are treated and how they fit within the broader tax position of an investment.

More than an annual tax deduction

A depreciation schedule generally identifies two broad categories of deductions: eligible capital works, such as the building and certain structural improvements, and the decline in value of eligible plant and equipment.

For qualifying residential construction, capital works deductions are generally available over 40 years at 2.5 per cent of eligible construction expenditure. Importantly, this calculation is based on eligible construction costs rather than the price paid for the property. An investor purchasing a property that is already several years old may therefore still have a substantial period of capital works deductions available.

Plant and equipment are treated differently. Since changes introduced in 2017, investors generally cannot claim depreciation on second-hand depreciating assets acquired as part of an established residential property. New assets subsequently purchased for the property can be treated differently.

It is one reason two properties with similar purchase prices can have quite different depreciation profiles.

Two Canberra properties, two different positions

Consider an investor purchasing an established townhouse in Belconnen in late 2026.

If the property was built in 2015, there may still be many years of eligible capital works deductions remaining.

However, because it is an established property acquired after the May 2026 cut-off, the treatment of any overall rental loss from 2027–28 will differ from the previous negative gearing arrangements. The depreciation does not disappear. What can change is how, and when, that deduction affects the investor’s overall tax position.

Compare this with the purchase of a qualifying newly completed apartment in Phillip, Canberra.

A new property may retain access to negative gearing under the new arrangements, subject to the relevant requirements. It may also include eligible capital works together with new depreciating assets that have not previously been used.

The purchase prices may be comparable, while the tax treatment could be quite different. This does not make one property inherently a better investment than the other. Tax treatment is only one consideration alongside price, location, rental demand, financing costs, vacancy risk, ongoing expenses and an investor’s individual objectives.

It does, however, make understanding the detail increasingly important.

Renovations can alter the picture

Depreciation also remains relevant well beyond the initial purchase. Consider an investor who owns a rental property in Weston Creek and replaces the air-conditioning system, installs new blinds and undertakes a substantial kitchen renovation.

Those costs are not necessarily treated in the same way.

Some expenditure may relate to depreciating assets, some may qualify as capital works, while repairs and maintenance can have different tax treatment again.

Maintaining accurate records of improvements, replacements and renovation expenditure therefore becomes an important part of the property’s financial history.

Where substantial works are undertaken, it may also be appropriate to review an existing depreciation schedule rather than assume the original report continues to reflect the property in its current form.

The importance extends to eventual sale

Depreciation should also be considered in the context of the entire ownership period, rather than simply as an annual tax deduction.

Capital works deductions can affect a property’s cost base when capital gains tax is calculated on eventual sale. In some circumstances, amounts claimed (or amounts that could have been claimed) may need to be taken into account.

With capital gains tax arrangements also changing from 1 July 2027, maintaining accurate records throughout the ownership period takes on additional importance.

A depreciation report can therefore serve a broader purpose. It provides a record of eligible construction and assets that can assist an investor’s accountant or tax adviser during ownership and again when the property is ultimately sold.

The question investors should be asking

Investors have traditionally asked: “How much depreciation can I claim?”

A more useful question in the current environment may be, “What is the depreciation position of this property, and how does it interact with the way my investment is taxed?”

For some investors, available deductions may have an immediate effect. For others, they may contribute to losses that are carried forward. Investors who acquired property before the May 2026 cut-off may be in a different position again.

There is no single outcome that applies to every investor or every property. What has become more important is understanding the detail.

A depreciation schedule is not simply about identifying an additional deduction at tax time. It can form an important part of understanding the financial and taxation profile of an investment property, including what deductions may be available, how long they may continue and how they interact with the broader treatment of the asset.

In a more complex property tax environment, having accurate information about the property itself has arguably never been more important.