Working out the cash flow on an Australian investment property usually starts with a basic budget that tracks the money coming in and going out of your bank account. Rent comes in, while loan repayments, rates, insurance and maintenance go out. Depreciation doesn’t work like that. It’s a tax deduction for the wear and tear on the building and the assets inside it. No cash changes hands, so it doesn’t appear as a transaction in your budget or bank feed.
It can still affect your cash flow, because it may reduce the tax you pay, depending on your circumstances. Here’s where it fits, how investors generally account for it, and how to get an estimate for your own property. How it applies to your tax position is a question for your accountant.
Why does my investment property budget look worse than it is?
Because a budget only records cash, and some of what matters for a rental property isn’t cash.
Budgeting for an investment property can feel like a lot, especially when you’re looking back over a year of statements trying to work out where the money went. If you’d rather not piece it together yourself, there are plenty of apps that turn your statements into a budget for you. Whatever you use, depreciation won’t show up as a transaction in your bank feed, and that’s where an estimate comes in.
A budget answers a simple question: did more money come in than went out? That’s the right question for keeping the lights on. It just doesn’t tell you the whole story at tax time, because some deductions have no matching payment in the year you claim them. Depreciation is one of them. How much is available depends on the property and the rules that apply to it.
What is depreciation on an investment property?
It’s a deduction for the building and its fittings wearing out over time, claimed bit by bit over many years.
Tax depreciation lets property investors claim deductions for the wear and tear of a building (Division 43 capital works) and the plant and equipment inside it (Division 40). These deductions can lower taxable income, which may reduce the tax payable, depending on individual circumstances.
The two parts work differently.
- Capital works (Division 43) covers eligible construction expenditure on the building and qualifying structural improvements. The ATO says the rate for these capital works is generally 2.5% or 4% per year, spread over 40 or 25 years. The deductions can’t add up to more than the construction cost.
- Plant and equipment (Division 40) covers assets that wear out faster, such as a hot water system, carpet, blinds or an oven. Each asset is generally claimed through its “decline in value”. That’s the tax term for the drop in an asset’s value over its effective life, which is the period used to calculate its depreciation.
Special rules generally restrict claims for second-hand plant and equipment in established homes. The restriction applies if you bought an established residential property after 7:30pm (AEST) on 9 May 2017. In that case you generally can’t claim decline in value for second-hand plant and equipment that came with the property, unless an exception applies. New assets you buy for the rental can still be claimed, and capital works aren’t affected by this rule. Our guide to second-hand property depreciation covers the detail, and how the two types of depreciation work explains the split.
What’s the difference between pre-tax and after-tax cash flow?
Pre-tax cash flow is what your budget shows you. After-tax cash flow also accounts for the effect your deductions have on the tax you pay.
Pre-tax cash flow is your rent minus the cash you spend holding the property over the same period. That includes loan repayments (both interest and principal), rates, insurance, strata, property management and repairs. If that number is negative, you’re topping the property up from your own pocket. Not all of those costs are treated the same way for tax. Loan interest is generally deductible, for example, but principal repayments generally aren’t.
After-tax cash flow looks at the same cash movements, plus the effect of the property’s tax treatment. For tax, your deductible expenses, including depreciation, are set against your rental income to work out your net rental income or loss. Depreciation sits in the tax calculation, not in your cash outgoings. There’s no cash payment when you claim it, but its effect on your tax can still flow through to your after-tax position. The tax effect depends on your overall tax position, and a deduction isn’t the same as an equal amount of cash back.
This is where two terms you’ll hear from your accountant come into play.
- Negative gearing generally describes a property whose deductible rental expenses are more than its rental income, giving a rental loss for tax purposes. Whether that loss can be used against your other income depends on the rules that apply to the property.
- Positive gearing generally describes a property whose rental income is more than its deductible rental expenses, giving net rental income for tax purposes. That doesn’t always mean positive cash flow, because costs like principal repayments come out of your pocket but aren’t deductible.
A tax loss and a cash shortfall aren’t the same thing. Depreciation can change which side of the gearing line a property falls on. A property that looks close to break-even in your budget may show a lower taxable rental income, or a loss, once depreciation is counted. What that means for your tax depends on your income, your other deductions and the rules that apply to your property. It’s worth working through with your accountant rather than guessing.
Can depreciation show up in my pay instead of at tax time?
Sometimes. The effect of your rental deductions usually shows up when you lodge your tax return. There’s also a way to have the tax taken from your pay during the year better reflect your estimated end-of-year tax.
It’s called a PAYG withholding variation. PAYG withholding is the tax your employer takes out of each pay. A variation is an application to the ATO to change that amount. The ATO says its purpose is “to make sure that the amount of tax withheld during the income year best meets your end-of-year tax liability.” If it’s approved, the new amount starts from the next available pay day after your employer gets the notice.
A few things to know before you raise it with your accountant.
- The ATO generally only processes an application if you’ve lodged all required tax returns and activity statements. Activity statements are forms some taxpayers use to report things like GST or PAYG instalments. You also can’t have an outstanding tax debt.
- The application asks for details of each rental property you own.
- It’s based on estimates. The ATO is clear that “your actual tax liability will be determined after you lodge your tax return”. If your actual income or deductions differ from the estimates used, the tax withheld may not cover your final bill. You could then have extra tax to pay.
Whether a variation suits you, and what goes into it, is a question for your accountant. A depreciation schedule shows them the depreciation that may be available. They’ll weigh that up with your other income, expenses and overall tax position.
Does this work the same if I bought recently?
Not always. Changes to negative gearing that start on 1 July 2027 affect some properties bought after the May 2026 Budget.
The new limits generally affect investors who buy established residential property after 7:30pm AEST on 12 May 2026. The government says those investors will still be able to deduct losses against residential property income and carry unused losses forward. From 1 July 2027, though, they generally won’t be able to deduct them against other income like wages. The ATO says properties held at 7:30pm AEST on 12 May 2026 are exempt. It also says the changes limit negative gearing for residential property to new builds.
The negative gearing changes don’t, on their own, remove depreciation deductions that are otherwise available. What they change is what a resulting rental loss can be used against. Under the new rules, a rental loss may not be deductible against your wages. If so, that may affect whether a PAYG withholding variation based on that loss is right for you. Your accountant can work this through with you. Our article on what the 2026 changes mean for recent purchases covers who’s affected, and your accountant can confirm where your property sits.
How do I estimate depreciation for my property?
Start with an estimate. If you need figures to claim, get a schedule.
Our free property depreciation calculator gives an indicative estimate for your investment property using the basics. That includes the property type, state, year built, size, quality of finishes and whether you bought it new or established. It gives a first-year and five-year estimate, split between capital works and plant and equipment, with a lower and higher range. The estimate is indicative only and must not be used to claim deductions in a tax return.
A depreciation schedule prepared by a quantity surveyor gives your accountant a year-by-year breakdown of the depreciation that may be available for your property. Those numbers can then feed your budget, your tax return and any conversation about your pay.
The short version
- Bank feeds record cash, so depreciation won’t show up there as a transaction.
- Depreciation can lower taxable income, which may reduce the tax payable, depending on individual circumstances.
- A PAYG withholding variation can change the tax taken from your pay during the year, if it suits your situation. Your final tax is still worked out when you lodge.
- For established residential property bought after the May 2026 Budget, rental losses generally can’t reduce tax on wages from 1 July 2027.
- The calculator gives an indicative estimate. A depreciation schedule gives your accountant a year-by-year breakdown to assess when preparing your return.
Where to from here
How depreciation affects your cash flow depends on your property and your circumstances, so speak with your accountant about how this applies to you.
TDA prepares tax depreciation schedules and property valuations across Australia. To get a schedule for your property, you can order a depreciation schedule or call us on 1300 417 317.
This article is general information only and isn’t tax, financial or investment advice. TDA does not provide tax, financial or investment advice. Speak with your accountant or adviser about your own circumstances.
