Depreciation and Cashflow: A Property Investor’s Essential Guide by Mike Mortlock of MCG Quantity Surveyors
From a property investment purchasing point of view, tax depreciation on investment property should be low on your priority list. However, from a cashflow point of view, there’s not much challenging it on the podium!
What Is Depreciation on Investment Property and Why It Matters
Depreciation on investment property refers to the reduction in value of building components and eligible plant and equipment over time, which property investors can claim as a tax deduction. For example, a client’s average first-year depreciation deduction of $9,414 on a typical investment property means if you are earning $100,000 per year, you could net approximately $3,483 back in your pocket annually. That’s around $67 a week.
If you’re reviewing property investment options, keep in mind this is meant as a guide only and you should seek an accountant’s advice. From a cash flow perspective, depreciation is hard to beat.
How Depreciation Benefits Your Cash Flow as a Property Investor
Depreciation on investment property helps to lower your taxable income, meaning you will likely pay less tax and hold onto more rental income. For property investors, this translates into stronger cash flow and the ability to reinvest.
When assessing your investment property strategy, it’s easy to see why depreciation is considered a powerful tool for boosting returns.
Understanding Depreciation in Property Investment Costs and Returns
When investing in property, cash flow is the balance between rental income coming in and expenses going out. Investors often underestimate ongoing costs such as:
- Property manager fees
- Council rates
- Strata fees (if applicable)
- Maintenance costs
- Smoke alarm checks
- Service costs
- Accountant fees
- And of course, the mortgage!
These costs can add up fast, turning what looked like a neutrally-geared investment into a drain on your pocket. Depreciation acts as an on-paper loss that minimizes your taxable income, improving your cash flow and overall return on investment.
The Hidden Costs of Property Investment
It adds up, and what seems on paper like a lovely little neutrally geared investment, can certainly start having you chip into your back pocket to keep it running. That is where the true value of depreciation is. It is an essentially an on-paper loss that minimises your taxable income, improving your overall cashflow.
Maximising Cashflow with PAYG Variations
Many investors utilise PAYG tax variations to estimate their tax payable weekly, helping them to get a better handle on the ongoing costs of the investment.
How to Use a Tax Depreciation Schedule in Your Investment Strategy
A tax depreciation schedule is a document prepared by a qualified quantity surveyor, detailing the deduction amount you can claim each year on your investment property under the rules of the Australian Taxation Office (ATO). It includes two major components:
- Division 43 — Capital Works for structural elements of a building
- Division 40 — Plant and Equipment assets such as carpets, blinds, and appliances
Using a tax depreciation schedule helps you maximize claimable deductions on your investment property, enhance cash flow, and improve your long-term investment strategy.
3 Key Triggers That Indicate When a Depreciation Schedule Makes Sense
Here are three situations where ordering a depreciation schedule usually pays off:
- You’ve purchased a new or recently built investment property, meaning a higher portion of building and fixture value qualifies for depreciation.
- You’ve made substantial renovations or major upgrades to an investment property, increasing eligibility for deductions.
- You’re a property investor with multiple properties and need to optimize cash flow across your portfolio. Depreciation deduction becomes a strategic component.
If any one of these triggers applies to you, it’s worth exploring a depreciation schedule with your accountant and a qualified quantity surveyor.
Final Thoughts on Depreciation on Investment Property
Depreciation on investment property is an essential tool for property investors who want to maximize their tax savings and improve their cash flow. By understanding how depreciation works and using a tax depreciation schedule, you can significantly reduce your taxable income and enhance your investment returns.
If you’re unsure whether your property qualifies, or you’d like help integrating depreciation strategy into your investment decision-making, our expert buyers-agent services are here to support you. Simply contact us to speak with our team.
Mike Mortlock is the Managing Director of MCG Quantity Surveyors and is an industry leader in tax depreciation. Mike has worked as an expert depreciation consultant with several major firms such as McDonalds, CMC Markets, Deloitte, PwC and more. He has completed thousands of depreciation schedules for residential and commercial property and is in demand as a public speaker and property commentator having been featured in The Financial Review, ABC Radio, Domain, Real Estate.com, Sky Business and other print and radio publications.
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