Tax depreciation is a powerful way to maximise tax deductions on a rental property. According to the latest ATO figures, depreciation ranks as the second-largest tax deduction for residential property investors – making it a key strategy for boosting cash flow. Yet despite its financial advantages, depreciation remains one of the most underclaimed or misapplied deductions.

This article explores the common property investment mistakes people make when it comes to depreciation and provides clear, actionable guidance on how to avoid these pitfalls.

• Mistake 1: Not claiming depreciation at all
• Mistake 2: Taking shortcuts to save time or money
• Mistake 3: Assuming older or low-value properties do not qualify
• Mistake 4: Delaying schedule preparation or overlooking back claims
• Mistake 5: Misclassifying repairs, maintenance and capital improvements
• Mistake 6: Inaccurate apportionment in co-owned properties

Mistake 1: Not claiming depreciation at all

Failing to claim depreciation is one of the most significant and avoidable rental property investment mistakes. Many investors are unaware that depreciation is a legitimate non-cash deduction that reduces taxable income, ultimately increasing cash flow.

A professionally prepared depreciation schedule from a TENfold property partner quantity surveying firm can yield average first-year deductions exceeding $11,000, even on mid-tier residential properties. These deductions can significantly improve cash flow and enhance the investment’s financial performance.

Mistake 2: Taking shortcuts to save time or money

In an effort to save time or reduce upfront costs, some investors skip essential steps when organising their depreciation schedule – often at the expense of thousands in missed deductions or greater compliance risks.

Skipping site inspections or relying on desktop reports

One common shortcut is opting for a desktop-only report, which is prepared without a physical inspection of the property. These reports rely solely on information provided by the owner, such as floor plans, photos or sales records, and can easily miss valuable capital works or plant and equipment assets installed during renovations that aren’t obvious to the untrained eye.The Australian Institute of Quantity Surveyors (AIQS) reinforces the importance of on-site assessments. In its ‘Quantity Surveyor’s Guide to Residential Tax Depreciation’, it supports the approach to physical inspections as essential to producing accurate, ATO-compliant depreciation schedules. This is especially important for second-hand properties, where hidden improvements or undocumented changes are common.

Self-assessing depreciation

Another risky shortcut is self-assessing depreciation. Depreciation is a complex area of tax legislation involving over 6,000 assets listed by the ATO, each with its own effective life and rules under Division 40 (plant and equipment) and Division 43 (capital works).Many investors mistakenly attempt to self-assess their depreciation claims, unaware of how easily items can be misclassified or omitted. These common errors can result in under-claimed deductions, ATO non-compliance, and higher risk of audit failure if the report does not meet required standards.

Did you know?

Misclassifying assets can seriously reduce your depreciation benefits.

Take a floating timber floor, for example – it’s considered plant and equipment under Division 40 and typically depreciated at 13.33%. But if it’s mistakenly claimed as a structural item under Division 43 (at just 2.5% per annum), your deduction drops significantly.

The same goes for a $4,950 carpet. If claimed under Division 43, the first-year deduction is only $124. But under the correct Division 40 classification, that jumps to around $660 – a major difference for your tax return.

Engaging a TENfold property endorsed qualified quantity surveyor is essential. A professionally prepared depreciation schedule accurately identifies all eligible deductions, covering both Division 40 (plant and equipment) and Division 43 (capital works). This ensures investors capture every claimable component, maintain compliance with ATO requirements, and maximise their post-tax returns.

Mistake 3: Assuming older or low-value properties do not qualify

A common misconception is that depreciation applies only to newly built properties. While legislative changes from 9 May 2017 restrict Division 40 deductions on second-hand dwellings, Division 43 capital works deductions remain fully accessible for structural components.

Properties built after 16 September 1987 qualify for annual capital works deductions of 2.5% of construction costs for up to 40 years. Older properties with eligible renovations may also claim depreciation, regardless of whether completed by current or previous owner.

Depreciation benefits are therefore not exclusive to high-end properties. Residential investment properties of all types, including older or lower-value dwellings, can offer substantial deductions. Overlooking this opportunity is a common and costly property investment mistake.

Mistake 4: Delaying schedule preparation or overlooking back claims

If you’ve missed claiming depreciation on your rental property, you’re not alone and it may not be too late to correct the oversight. One of the more common property investment mistakes is assuming that missed tax deductions can’t be recovered once a financial year has passed.

In fact, the ATO allows individuals to amend their tax returns, typically within two years of the original notice of assessment, through a process known as back-claiming.

Back–claiming allows investors to revise previously lodged returns to include legitimate but previously unclaimed deductions, such as property depreciation. If accepted, these amendments can result in a tax refund and improve overall cash flow. Delayed or overlooked depreciation schedules often lead to thousands of dollars in lost benefits, particularly during the initial years of ownership.

Some investors who self-assess may later discover under-claimed deductions but mistakenly believe it’s too late to act. However, the ATO’s two-year amendment period offers a valuable opportunity to recover entitlements that would otherwise remain lost.

Engaging a registered quantity surveyor to prepare a retrospective depreciation schedule will ensure all eligible deductions are correctly identified by Rider Accountants & Advisors in line with ATO regulations.

Mistake 5: Misclassifying repairs, maintenance and capital improvements

Correctly distinguishing between immediate deductions and depreciable capital improvements is a common issue. ATO classifications are as follows:

• Repairs involve restoring existing property components to their original condition without enhancing their value or function. Examples include fixing a leaking tap or repairing a damaged fence. These costs are typically immediately deductible in the year they are incurred.
• Maintenance refers to routine work undertaken to prevent deterioration or damage to the property. Activities such as repainting walls or servicing air conditioning units fall under this category. Like repairs, maintenance expenses are generally immediately deductible.
• Capital improvements are works that enhance the property’s value, functionality, or extend its life beyond the original state. Examples include adding a new room or upgrading kitchen appliances. These costs are not immediately deductible; instead, they must be depreciated over time as either capital works deductions or plant and equipment depreciation, depending on the nature of the improvement.

A site inspection from a depreciation specialist will ensure that repairs, maintenance and capital improvements are correctly classified and depreciation deductions are maximised.

Mistake 6: Inaccurate apportionment in co-owned properties

In jointly owned properties, depreciation must be claimed according to each owner’s legal ownership share on the title. A common mistake is splitting deductions equally or favouring the higher-income earner. However, ATO rules require claims to match legal ownership, not financial contributions or informal co-owner arrangements.

When depreciation is correctly apportioned, co-owners can benefit from accelerated depreciation rules on an individual basis. Each owner is entitled to claim the immediate write-off for assets costing $300 or less and to use the low-value pool for assets valued under $1,000, independent of the other owners.

This means that splitting ownership can unlock additional tax benefits that may not be available to a sole owner. A properly prepared and apportioned depreciation schedule ensures compliance with ATO guidelines and helps avoid common property investment mistakes, while maximising allowable deductions for each co-owner.