Depreciation is the one rental-property deduction that costs you nothing at the time you claim it. The ATO lets you write off the wear and tear of your building and its fittings against your rental income — even though you paid for that wear years ago.
There are two separate claims. Division 43 (capital works) covers the building itself — 2.5% of the original construction cost each year for 40 years. Division 40 (plant and equipment) covers the removable stuff — carpet, air conditioning, appliances — depreciated over each item’s effective life. Miss either one and you’re leaving money behind: even a 2015-built second-hand unit typically yields around $15,000 a year in deductions once a quantity surveyor has priced it properly.
How it actually works
Think of your rental property as two assets for tax purposes. One is the structure: the slab, walls, roof, wiring, plumbing, built-in cupboards — everything that stays when the tenant leaves. The other is the collection of removable items inside: oven, blinds, carpet, hot water system, garage door motor. The tax law treats them completely differently.
The structure earns you capital works deductions. The rule is brutally simple once you know it: for residential property where construction commenced after 15 September 1987, you claim 2.5% of the construction cost every year for 40 years from completion. A $550,000 build cost hands you $13,750 a year, every year, for four decades. The clock is tied to the building’s completion date, not to you — when you buy from a previous owner, you inherit the years remaining on their clock. It does not restart.
The fittings earn you plant and equipment depreciation. Each item gets an ATO effective life and depreciates at either the diminishing value method (bigger claims early) or the prime cost method (even claims). Carpet, for example: 10-year effective life, 20% diminishing value or 10% prime cost.
Two speed-ups are worth knowing. Assets costing $300 or less can be written off immediately (a set of four $250 dining chairs totalling $1,000 counts as one $1,000 asset — a classic ATO trap). And assets under $1,000 can go into the low-value pool: 18.75% in the first year, 37.5% every year after, with no need to track small items individually.
For a sense of how these deductions move your cash flow, try the numbers on cgthub.au’s rental yield calculator alongside our income tax calculator — seeing the after-tax picture side by side is usually what convinces people.
Division 43 vs Division 40 at a glance
| Division 43 — Capital works | Division 40 — Plant & equipment | |
|---|---|---|
| What it covers | The building structure: slab, walls, roof, wiring, plumbing, built-ins, driveways, fences, retaining walls | Removable assets: carpet, blinds, oven, air conditioner, hot water system, light fittings |
| Rate | 2.5% per year over 40 years (4% over 25 years only for limited categories: build-to-rent, traveller accommodation) | Varies by ATO effective life — e.g. carpet 20% diminishing value, air conditioner 20%, hot water system 12.5% |
| Based on | Original construction cost (not what you paid for the property) | What the asset cost |
| Second-hand residential | Unaffected by the 2017 rules — still fully claimable | Blocked after 9 May 2017 (details below) — except items you install yourself |
| On sale | Claimed amounts reduce your cost base, increasing future CGT | Balancing adjustment: written-down value vs sale proceeds, treated as income or deduction |
| Who estimates it | A quantity surveyor (under Tax Ruling TR 97/25, the ATO accepts their construction-cost estimates) | You can estimate asset values yourself — but see the DIY trap below |
The 2017 second-hand rule (the one people get wrong)
On 9 May 2017 the Budget changed Division 40 for residential property, and the change became law that November. The rule: if you buy a second-hand residential investment property under a contract exchanged after 7:30pm AEST on 9 May 2017, you cannot claim depreciation on the plant and equipment that came with the house. The dishwasher, the carpet, the blinds — they’re “previously used”, and previously used is now a dead end.
Three things soften this more than people think. First, capital works were untouched — Division 43 on second-hand property works exactly as before, and it makes up the bulk of most depreciation schedules (around 85–90%, per quantity surveyor firms’ own figures). Second, anything you buy and install yourself after settlement is fully claimable, even in an established property. Replace the dead air conditioner for $3,500 and that $3,500 starts its own depreciation run at 20% diminishing value. Third, pre-May-2017 investments were grandfathered — if the property was income-producing at any point between 1 July 2016 and 30 June 2017, the old rules kept applying.
There is one nasty edge: buy a brand-new apartment, live in it yourself for a while, then rent it out after 30 June 2017, and your own brand-new appliances are deemed “previously used” too. Move-in day silently destroys the Div 40 claim on everything you fitted.
Step-by-step: claiming it for 2026-27
1. Confirm the property qualifies. It must be genuinely available for rent during 2026-27. You can only claim for income-producing periods — a month between tenants where it wasn’t advertised gets apportioned out.
2. Pin down the construction dates. Division 43 depends on when construction commenced. Before 22 August 1984: nothing. 1984–1987: 4% over 25 years. After 15 September 1987: 2.5% over 40 years. Renovations and extensions are their own Div 43 events — a 2022 kitchen reno on a 1978 house starts its own 40-year run from completion.
3. Get the quantity surveyor schedule. Under TR 97/25, quantity surveyors are the ATO-accepted professionals for estimating construction costs. They inspect (or desktop-assess) the property, split every item into Div 43 or Div 40, value it, assign effective lives, and hand you a 40-year table your accountant applies each year. It typically costs around $600–$800 and the fee itself is fully deductible as a cost of managing your tax affairs — so on a 32% marginal rate it really costs you $400–$550.
4. Install, then document. Anything you add yourself — new oven, new carpet, new AC — keep the receipts; these are your claimable Div 40 assets. If you’re renovating, get the QS report (including a scrapping schedule) before demolition. You can only claim the undeducted balance of torn-out items you had valued first — once they’re in a skip bin, the deduction is gone.
5. Hand the schedule to your accountant. Your return is filed on the numbers. The same schedule works every year unless you renovate, which triggers an update.
Worked example: the $750,000 unit, built 2015
Priya buys an established two-bedroom unit in Sydney for $750,000, settles September 2026, rents it out immediately. It was built in 2015 with a construction cost of $550,000 (QS-estimated — she has no builder records, which is completely normal).
Division 43: Construction commenced after 15 September 1987, so 2.5% over 40 years. $550,000 × 2.5% = $13,750 a year. The building’s clock started in 2015, so by 2026-27 eleven years are gone — she has 29 years of $13,750 left. This part is completely unaffected by the 2017 rules.
Division 40: The unit’s original carpet, blinds and appliances are previously used and unclaimable. But Priya installs a new $3,500 air conditioner and $4,000 of new carpet after settlement — both fully claimable. Carpet at 20% diminishing value: $4,000 × 20% = $800 in year one. Air conditioner at 20%: $3,500 × 20% = $700. Total Div 40 first year: $1,500.
The bill: $13,750 + $1,500 = $15,250 deduction against her 2026-27 rental income. On a $120,000 salary Priya sits in the 30% bracket plus the 2% Medicare levy at 32% marginal, so the deduction is worth $4,880 in tax saved. Her $700 QS fee was itself deductible, so the schedule paid for itself nearly seven times over in year one.
The new-build mirror: had Priya bought the same unit brand new for $750,000, her first-year deduction would look more like $18,000–$20,000 (BMT’s assessments average over $15,000 for new residential property in the first full year) — roughly $5,800–$6,400 saved at the same marginal rate. And this is exactly why the 2026 Budget’s negative-gearing reform — established-property losses quarantined against salary income from 1 July 2027 — makes depreciation timing matter more than ever: claim early, claim everything.
The cost-base catch nobody mentions
Here is the one thing quantity surveyor websites never put on their brochures: every dollar of Division 43 you claim reduces the property’s cost base for CGT when you sell. Claim $13,750 a year for five years and your cost base is $68,750 lower. That inflates your capital gain by $68,750, which — after the 50% CGT discount and a 32% marginal rate — costs you roughly $11,000 in extra tax at sale.
Before you panic, do the full sum: you saved $22,000 in tax over those five years and pay back $11,000 later, on dollars you got to keep for years in between. It’s still a clear net win — but it’s a win with a tail, and it’s worth knowing your accountant isn’t hiding anything. (If the property later qualifies for the main residence exemption or the 6-year rule, the CGT side may not bite at all — see our 6-year rule guide and cost base guide.)
Common mistakes that cost real money
Assuming an old property means no depreciation. A 1960s house with a 2019 bathroom reno still earns Div 43 on the reno for 40 years from 2019, plus Div 40 on anything you’ve installed since.
DIY-ing the schedule and miscategorising. BMT’s own carpet example: $3,650 of carpet claimed as a “fixed asset” at 2.5% yields $91 a year; claimed correctly at 20% it’s $730 in the first year. You are allowed to estimate asset values yourself — but construction costs, only a QS can do to ATO standards.
Renovating without a scrapping schedule. Tear out the old kitchen before the QS values it and you forfeit the final write-off of everything removed. Report first, sledgehammer second.
Claiming for non-rented periods. Div 43 and Div 40 both apply only to income-producing use. Lived in it for three months of the year? Apportion. Never advertised between tenants? No claim for that stretch.
Confusing borrowing costs with depreciation. Loan establishment fees, lenders mortgage insurance and mortgage stamp duty are “borrowing expenses”, not depreciation — claimed over the loan term or 5 years, whichever is shorter (if they’re over $100). They belong in a different box on the return, but they’re real deductions people forget.
Leaving years unclaimed. If you never got a schedule, you can still claim past years by amending your returns (generally a two-year window), with the schedule backdated to settlement. Thousands of investors leave three or four years of deductions in the drawer.
Tips for 2026-27
- Get the schedule before your first tax return for the property — orders placed in May and June are an annual industry bottleneck.
- Renovating in 2026-27? The reno starts its own Div 43 run from completion — keep every invoice, because the QS needs proof of what was done and when.
- Track settlement date carefully: first-year claims are pro-rated by days owned. A 59-day ownership slice can still produce thousands in deductions thanks to the immediate $300 write-offs and low-value pooling — worth claiming rather than waiting a year.
- Revisit the schedule after every renovation. The original report doesn’t cover new work, and new work is usually the highest-yielding Div 40 stock in the building.
FAQ
Can I claim depreciation if my property was built before 1987?
On the original build, no — residential construction commencing before 22 August 1984 earns no capital works deduction, and 1984–1987 earns 4% over 25 years (long since expired). But any structural work done after 15 September 1987 — kitchen reno, extension, new driveway — starts its own 2.5% over 40 years, and anything you’ve installed yourself still earns Div 40. A schedule is usually still worthwhile.
Is a depreciation schedule actually worth it on a second-hand property?
Almost always. The 2017 rules removed Div 40 on the existing fittings, but Division 43 — the bigger claim, 2.5% a year on the construction cost for 40 years — is completely untouched by those rules. At around $600–$800 for a fully deductible schedule, one year’s Div 43 claim typically covers the fee many times over.
Does depreciation increase my capital gains tax when I sell?
Division 43 claims do — they reduce your cost base dollar-for-dollar, so your eventual capital gain is larger. Division 40 claims don’t reduce the cost base; instead there’s a balancing adjustment when the asset is scrapped or sold. Net-net, the tax you save today at your full marginal rate still beats the extra tax later at the discounted CGT rate.
Can I claim depreciation for years I missed?
Yes, by amending past returns — generally within two years of the original assessment. A quantity surveyor can backdate the schedule to your settlement date and give your accountant the per-year figures. If you’ve owned the property for five unclaimed years, don’t walk away from that.
Can I prepare the depreciation schedule myself?
You can value plant and equipment yourself, but the ATO accepts construction-cost estimates only from appropriately qualified professionals — in practice, registered quantity surveyors under TR 97/25. Miscategorisation (carpet as “building” at 2.5% instead of a removable asset at 20%) is the classic DIY error. Paying the professional is the cheap option.
What happens to my depreciation if I move into the property?
While it’s your main residence, no deductions — both divisions apply only to income-producing periods. Watch the 2017 trap: if you lived in a new build before renting it out after 30 June 2017, your own appliances count as “previously used” and lose their Div 40 claims permanently.
Bottom line
Depreciation is the least effortful money in the Australian tax system. One report, usually under $800 and fully deductible, unlocks a 40-year stream of deductions your accountant can apply every July without another thought — roughly $15,000 a year on a typical unit, worth around $4,800 in real tax at a 32% marginal rate. The investors who miss out aren’t the ones with old properties or modest portfolios; they’re the ones who never ordered the schedule. If you own residential investment property and don’t have one, that’s the one phone call to make this month. Then make sure the rest of your position is tight: how rental income is taxed, negative gearing after the 2026 Budget, and state land tax.
Figures checked against ATO guidance as at October 2026 — see the depreciating assets in rental properties, second-hand assets and capital works deductions pages. Tax rates and brackets are 2026-27. Depreciation rules themselves are unchanged for 2026-27; the 2026 Budget’s property reforms apply from 1 July 2027. This is general information, not personal advice — talk to your accountant before acting on it.
