Depreciation and Capital Works Deductions for Investment Property

Two different tax deductions get lumped together under the word "depreciation" for a rental property, and confusing them is a costly mistake. Division 43 writes off the building itself. Division 40 writes off the plant and equipment inside it, such as carpets, blinds and appliances. A 2017 law change restricted Division 40 for most buyers of second-hand residential property, and it is widely misunderstood, often reported online as banning depreciation altogether. It did not. Here is how the two deductions actually work, and where a quantity surveyor's report earns its fee.

Two deductions, not one

Division 43 of the Income Tax Assessment Act 1997 covers capital works: the building's structure, plus later additions like a carport, fence or retaining wall, written off over decades at a fixed rate. Division 40 covers depreciating assets, often called plant and equipment: separately identifiable items that are not part of the building's structure and can reasonably be expected to be replaced sooner. Since 2017, the two have a different answer to who can claim them on a second-hand property.

Division 43: writing off the building

You can only claim a capital works deduction if the property was built after 17 July 1985, and only once construction is complete. The ATO's construction date table sets the rate: for a residential building, construction between 18 July 1985 and 15 September 1987 is written off at 4% a year for 25 years, and construction from 16 September 1987 onwards at 2.5% a year for 40 years. Later structural improvements, such as a driveway added after 26 February 1992, generally sit at 2.5%. The deduction can never exceed the actual construction cost and applies to the building only, not the land. Claiming it also reduces the property's cost base for capital gains tax on sale, so the benefit is timing, not a free deduction.

Division 40 and the 2017 rule almost everyone gets wrong

Division 40 covers items like floating floors, curtains, a dishwasher or a hot water system, each claimed over its own effective life. The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 changed who can claim this for a residential property. From the 2017-18 income year, you generally cannot claim the decline in value of a second-hand depreciating asset, one already installed and used by someone else, unless you carry on a business of letting rental properties or hold the property through certain corporate structures. The ATO's own guidance ties this to when you purchased the property or asset, not the age of the building: buy an established home before 7:30pm AEST on 9 May 2017 and the old rules still cover whatever was in it, buy after that time and previously used assets are no longer deductible to you.

What still qualifies

This is the part most commonly reported wrong. The 2017 change did not touch Division 43, so capital works on a second-hand property built after 17 July 1985 continue exactly as before. It also does not stop you claiming a brand-new asset bought and installed after settlement, and it does not apply to genuinely new stock: a property bought off the plan or within six months of completion, where no one has lived in it, still carries full Division 40 deductions. The restriction is specifically about inheriting someone else's used plant and equipment in an existing home.

Why a quantity surveyor's schedule is usually worth it

Construction cost cannot be estimated from the purchase price, the insured value or a rates notice, and the ATO does not accept any of those as evidence. If the original builder's records are not available, a report from a quantity surveyor or other appropriately qualified person fills that gap, and the fee is itself deductible. A typical schedule sets out the construction dates, an estimate of the original construction cost for Division 43, and an itemised list of depreciating assets with their value and effective life for Division 40, adjusted for the 2017 rule where it applies. Getting the construction date right matters more than it looks: a property built either side of 15 September 1987 sits on opposite sides of the 4% and 2.5% rate.

Getting your claim right

Because the correct treatment depends on exactly when a property was built and exactly when you bought it, working through your specific dates beats guessing from a rule of thumb picked up online. If you are also sorting through what a managing agent's statement says about repairs versus capital items, our piece on rental statements and correctly categorising expenses covers that distinction. Our property investor services can help you work out what a specific property qualifies for, and whether a quantity surveyor's report is worth commissioning before you lodge.

Disclaimer: This article contains general information only and does not constitute financial, legal or tax advice. It has been prepared without regard to your objectives, financial situation or needs. Tax and superannuation laws change frequently, and the information in this article may not reflect the current law or may become inaccurate over time. Before acting on anything in this article, you should consider its appropriateness to your circumstances and seek advice from a registered tax agent or qualified adviser.