Property valuation for a depreciation schedule: what you actually need

A tax depreciation schedule is prepared by a quantity surveyor and is based on the property's construction cost, not its market value, so strictly speaking you do not need a property valuation to claim depreciation on a rental. Where a market valuation does matter is a related situation many investors miss: when you turn a former home into a rental, the ATO can require a valuation as at the date it first earns income, and that figure sets your capital gains tax cost base.

Do you need a valuation for a depreciation schedule?

For the depreciation schedule itself, no. A tax depreciation schedule is a quantity surveyor's report that sets out the deductions you can claim each year on an income-producing property. It is built from construction and asset costs, not from a market valuation, so a property valuation is not what unlocks your depreciation claim.

That is the part people often get muddled. A market valuation tells you what the property is worth today. A depreciation schedule tells you how much of the building and its assets you can write off against your rental income over time. They answer different questions and are prepared by different professionals.

What a depreciation schedule actually is

A depreciation schedule lets the owner of an income-producing property claim two kinds of deduction, and a quantity surveyor prepares it because estimating construction costs is their specialist field. Accountants and real estate agents are not qualified to prepare one.

• Division 43 capital works covers the structural building: walls, floors, roofing, fixed items and extensions. For residential property where construction began after 15 September 1987, it is generally claimed at 2.5% a year over 40 years, based on the original construction cost.
• Division 40 plant and equipment covers removable, mechanical assets such as carpet, blinds, air conditioning and appliances, claimed over each item's effective life rather than a flat rate.

Where the original construction cost is not known, which is common for an established property, a quantity surveyor estimates it, and the ATO accepts qualified quantity surveyors for exactly this purpose.

Why it is based on construction cost, not market value

This is the key distinction. Depreciation reflects the cost of constructing the building and installing its assets, and the deduction is the decline in value of those costs over time. It has nothing to do with what the property would sell for.

So a $290,000 building component on a property built in 2005 produces roughly $7,250 a year at the 2.5% capital works rate, regardless of whether the property's market value has doubled since. A valuer's market value figure does not feed that calculation. That is why the schedule is a quantity surveyor's job, not a valuer's.

Where a valuation does matter: turning your home into a rental

Here is the situation where a market valuation genuinely is required, and it often gets overlooked. If you move out of your home and start renting it out, the ATO has a specific rule for capital gains tax.

If you first use your home to produce income after 20 August 1996, and you would have been entitled to a full main residence exemption if you had sold it immediately before, you are generally taken to have acquired the property at its market value at the date it first earned income. As the ATO puts it, you must get a market valuation of your home when you first start using it for rental, if that was after 20 August 1996.

That valuation resets the cost base for CGT, so when you eventually sell, the gain is measured from the market value at the date it first became a rental, not from what you originally paid. Getting a proper valuation as at that date can make a significant difference to your future CGT, which our guide to property valuation for capital gains tax explains further. Because it is a value at a past date, this is usually a retrospective valuation.

Splitting land from building

A valuation can also help with apportionment. Land does not depreciate, only the building and its assets do, so the value tied up in land is not part of a depreciation claim. When a property is bought as a whole, the purchase price has to be split between the land and the improvements for various tax purposes. A quantity surveyor handles the construction cost side in the schedule, and an independent valuation can support the market value split between land and building where that is needed.

Depreciation schedule and valuation: how they work together

For most investors the two are complementary rather than competing:

• A quantity surveyor prepares your depreciation schedule, so you claim Division 43 and Division 40 deductions each year.
• A registered valuer provides a market valuation where tax requires one, most importantly the market value at the date a former home first became a rental, and for CGT and cost base purposes.

Getting both right means you claim the depreciation you are entitled to and set your CGT cost base correctly, rather than discovering a missing valuation years later when you sell.

How Valato helps

Valato prepares independent, evidence-based market valuations across Australia, including retrospective valuations as at the date your property first started earning income, so your capital gains tax cost base is properly supported. For the depreciation schedule itself, you will need a qualified quantity surveyor, which is a separate engagement from the valuation.

If you need a valuation for CGT or a former home now producing income, you can compare the options or order in a couple of minutes, and speak with your accountant about how it fits your position.

Frequently asked questions

General information only: This article is general in nature and does not take into account your individual circumstances. It should not be relied on as tax, financial or legal advice. Depreciation and capital gains tax rules are complex; speak with a qualified quantity surveyor and accountant before making decisions about your property or tax position.