Using Property Depreciation to Fund Your Next Investment Purchase
Utilizing Depreciation as a Financial Strategy
By claiming depreciation on your existing rental properties, you can lower your taxable income, boost cash flow and create a funding source for your next acquisition. This guide walks you through the steps to capture those tax savings and put them toward a new investment.
How Depreciation Works
Depreciation lets property investors deduct the wear and tear of their building and its fittings over time. In Australia, it’s split into two main categories:
- Capital Works Deductions (Division 43): Applies to structural elements such as walls, roofing, and flooring. These are typically claimed at 2.5% per year for up to 40 years.
- Plant & Equipment Deductions (Division 40): Covers removable items like ovens, dishwashers and carpets. Each asset is depreciated over its effective life.
Case Study: Leveraging Depreciation for a New Property
Consider an investor who generates about $18,724 annually in depreciation tax savings—$11,825 from the building and $6,899 from fittings. They apply these savings toward a $540,000 Townsville property with a $2,592 monthly mortgage.
Financial Breakdown
- Annual Depreciation Tax Savings: $18,724
- Purchase Price of New Property: $540,000
- Monthly Mortgage Payment: $2,592
- Annual Mortgage Obligation: $31,104
With depreciation covering nearly 60% of the mortgage, the investor’s cash flow pressure is greatly reduced.
Five Steps to Acquire a New Property Using Depreciation
- Review Your Financial Position: Calculate your debt-to-income ratio considering household earnings. Depreciation deductions can lower your taxed income and improve your borrowing capacity.
- Select a High-Yield Location: Target areas offering strong rental returns—Townsville currently offers around 5.3% gross yield.
- Secure Funding: Aim for a 20% deposit (e.g., $108,000 on a $540,000 purchase). Your tax savings can help demonstrate serviceability to lenders.
- Engage a Quantity Surveyor: A specialist will prepare precise depreciation schedules for your existing and new properties, maximizing your deductions.
- Monitor Cash Flow: Perform regular reviews to ensure you maintain healthy liquidity and can handle any rate changes or vacancies.
Long-Term Financial Impact
By offsetting $31,104 of annual mortgage payments with $18,724 in tax savings, you free up capital to reinvest or save. Over time, as rents rise and you claim fresh depreciation on new assets, you can repeat this strategy to grow your portfolio.
Discover the #1 tax secret wealthy Australian property investors use to grow their portfolios faster — even in a high interest rate environment.
- Learn how to turn wear and tear into wealth
- See real examples of $15,000+ first-year deductions
- Understand how to structure your purchases for maximum after-tax ROI
Download Your Free Wealth Building Guide
This ebook reveals how to legally slash your tax bill while building long-term wealth through property. Learn the strategies savvy investors use to gain an edge — even before settlement.
- Maximise tax deductions and improve cash flow
- Understand Division 40 vs 43 and how to claim both
- Position yourself to reinvest and scale faster
Conclusion
Property depreciation is more than a tax shield—it’s a financial lever that can underwrite your next investment purchase. With the right planning and professional guidance, you’ll be well-positioned to expand your holdings and build long-term wealth. Assess your financial potential with an expert today and take the next step toward portfolio growth.
