Property investors often overlook how the type of property they invest in influences the depreciation claims they can make. Whether you own a residential, commercial, or industrial property, each category has unique rules and opportunities under Australian tax law.
How Property Type Affects Depreciation Claims
The type of property impacts both Division 40 and Division 43 deductions. Under Division 40, plant and equipment depreciation for residential properties acquired after 7:30 pm AEST on 9 May 2017 is limited—only new items or those installed by the investor can be depreciated. However, for commercial and industrial properties, you can claim depreciation on both new and second-hand plant and equipment.
Division 43 deductions relate to the building's structure and are generally available for all property types. However, the construction commencement date affects the available deductions. For instance, properties built after 16 September 1987 are eligible for capital works deductions.
How This Works in Practice
Consider a two-bedroom apartment in Sydney purchased in 2020 for $800,000. As a residential property, only new plant and equipment installed by the owner post-purchase can be depreciated. Let's say you install new air conditioning for $5,000. Under Division 40, you can depreciate this over its effective life of 10–15 years.
In contrast, a commercial property purchased for the same amount allows depreciation on existing plant and equipment. If the commercial property includes $50,000 worth of depreciable assets, you could claim these deductions, which could save you approximately $18,500 in tax at a 37% marginal rate in the first year alone.
Professional Insight
In our experience, the most significant oversight by investors is failing to distinguish between residential and commercial depreciation rules. Many investors miss out on potential deductions by not having a comprehensive depreciation schedule prepared by a professional. One thing we frequently see is investors not realising that commercial properties offer more flexibility and potential deductions, even for second-hand assets. Also, investors often underestimate the value of a detailed site inspection, which can uncover additional depreciable items not initially considered.
When Does the Answer Change?
When Should You Seek Professional Advice?
Depreciation claims depend on the specific details of your property and investment strategy. A Chartered Quantity Surveyor can identify all potential deductions and ensure compliance with Australian tax laws. It's also essential to consult with your accountant to align your depreciation strategy with your overall tax planning.