Depreciation is one of the quiet advantages of a new rooming house. It does not change the rent you collect, but it can change how much of that rent you keep after tax. Here is how it works, why rooming houses tend to carry more of it than a standard rental and the rule that makes new builds the clear winner.
The Two Types of Depreciation
The ATO splits property depreciation into two buckets.
Capital works (Division 43). This covers the building itself: the structure and items built into it. For residential rental properties where construction started after 15 September 1987, the deduction is generally 2.5% of the construction cost each year over 40 years.
Depreciating assets (Division 40). These are the plant and equipment items with a shorter effective life, such as appliances, air conditioners, hot water systems and carpets. They are claimed as capital allowances based on each item’s effective life.
Why Rooming Houses Carry More Depreciation
A standard four bedroom house has one kitchen, a couple of bathrooms and one laundry. A rooming house contains multiple kitchenettes and bathrooms. That means more fixtures, fittings and plant and equipment to depreciate.
On the capital works side, the higher build cost of a rooming house, driven by extra bathrooms, kitchenettes, fire separation and compliance work, creates a larger base for the 2.5% deduction.
As an illustration only: on my $570,000 build, in the first year I will receive $21,199 total depreciation benefits, diminishing to around $14,000 after 12 years.
The 2017 Rule That Favours New Builds
Since 1 July 2017, investors generally cannot claim depreciation on second-hand depreciating assets in a residential rental property. If you buy an existing rooming house, the appliances and equipment already in it typically cannot be claimed, unless an exception applies.
Build new and every item is new to you, so the full plant and equipment deduction is available from day one. This is one of the main reasons we focus on building rather than buying tired existing stock.
Getting a Depreciation Schedule
A quantity surveyor prepares a tax depreciation schedule that lists the capital works amount and every depreciating asset with its effective life. Your accountant uses it each year. For a new build, provide the builder’s contract, variations and final costs so nothing is missed.
Something to Know at Sale
Capital works deductions are not free money forever. When you sell, capital works deductions you have claimed can reduce your cost base, which can increase your capital gain. Your accountant should model this alongside your exit strategy.
Rooming House Depreciation FAQs
Can I claim depreciation on an existing rooming house I buy?
You can usually still claim capital works on the building if it was built after 15 September 1987. Second-hand plant and equipment generally cannot be claimed since 1 July 2017, unless an exception applies.
Do I need a quantity surveyor?
For a new rooming house, yes. A schedule makes sure every eligible item is captured, and the fee is generally deductible.
Does depreciation make a rooming house cash flow positive?
Depreciation improves your after-tax position, but the rent has to carry the loan. We treat depreciation as a bonus on top of the yield, not the reason to buy.
Our View
For higher income earners, depreciation on a new rooming house can translate into a meaningfully larger tax return, which improves the overall holding position. But it is a sweetener, not the strategy. The yield is the return. Build new, get a proper schedule and let your accountant handle the rest. Read more about building a property portfolio that pays for itself.
Want to see what depreciation could look like on a new rooming house? Book a discovery call with Yield Street Property Buyers and we will walk you through a full feasibility.
This article is general information only and does not constitute financial, legal or taxation advice. Information referenced is current at the time of writing and subject to change. Always seek independent professional advice before making investment decisions.