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Depreciation on an investment property: quantity-surveyor reports

A depreciation schedule is a report prepared by a qualified quantity surveyor that enumerates the depreciation deductions available on an investment property. It is a one-off cost ($550-$900) that pays back multiples over the property’s holding period through reduced taxable income.

What can be depreciated

Under ATO rules, two categories:

1. Capital works (Division 43) The structural elements of the building - walls, floors, ceilings, roof, built-in cabinetry, tiles, doors. For residential property built after 1987, capital works are depreciated at 2.5% per year over 40 years.

2. Plant and equipment (Division 40) Removable items - stove, dishwasher, oven, aircon, carpets, blinds, hot water system. Depreciated at various rates based on effective life. Typical 5-15 years depending on item.

The post-2017 rule that changed everything

Before 2017, investors could claim plant and equipment depreciation on second-hand items (i.e., when buying an established property with existing appliances). From May 2017, the ATO restricted plant and equipment depreciation to new property only, or items the investor purchases themselves.

This means:

  • New property: full depreciation on both capital works and plant and equipment
  • Established property: only capital works depreciation (the 2.5% building component)

The difference is substantial. On a $650k new apartment, depreciation in year 1 might be $14,000. On an equivalent established apartment, it might be $5,500. That $8,500 gap is worth $3,100-$4,000 in tax per year to a 37% marginal rate investor.

The report itself

A quantity surveyor inspects the property (or reviews existing plans and photographs), identifies every depreciable element, calculates the construction cost and current value of each, and produces a schedule showing year-by-year deductions for 40 years.

Reports include:

  • Opening value of each item
  • Annual depreciation calculation
  • Cumulative depreciation
  • Remaining written-down value
  • Prime cost vs diminishing value method tables

Your accountant uses the report to populate the depreciation line on your tax return each year.

The diminishing value vs prime cost choice

The ATO allows two calculation methods for plant and equipment:

  • Diminishing value: higher deductions in early years, lower later
  • Prime cost (straight line): equal deductions each year

For most investors holding 5-10 years, diminishing value produces higher net present value deductions. Your QS report typically shows both, and you elect at your first tax return.

What disqualifies a property

  • Buildings constructed before July 1985 (for capital works)
  • Pre-1987 dwellings may have been renovated - renovation costs can be depreciated separately if you can evidence the work and cost

When it’s worth it

For any investment property held 3+ years, a QS report pays for itself in year 1. The $700-$900 cost is deductible itself. If you didn’t commission one at purchase, commission one now - you can claim retrospective deductions by amending prior tax returns (up to 4 years back).

When it’s marginal

  • Very old established property (pre-1987 with no subsequent renovation): little depreciation available
  • Very short holding period (under 3 years): cost recovery marginal
  • Properties you are about to sell: the depreciation claimed reduces your cost base for CGT, offsetting the benefit

Who to commission

Qualified quantity surveyors registered with the Australian Institute of Quantity Surveyors (AIQS). Major national firms: BMT Tax Depreciation, Washington Brown, DEPPRO. Local QS firms are usually cheaper but equivalent. Turnaround is typically 10-15 business days.