Capital Works Deduction
A deduction for the construction cost of a building or structural improvement, typically claimed at 2.5% per year over 40 years.
Capital works deductions (Division 43) allow property investors to claim a deduction for the original construction cost of a building or structural improvement on an income-producing property. The standard rate is 2.5% per year for 40 years (for buildings constructed after 15 September 1987), meaning you can deduct 2.5% of the building's construction cost each year. Older buildings built between 18 July 1985 and 15 September 1987 may qualify for a 4% rate.
Capital works deductions apply to the building structure itself (walls, floors, roof, foundations) and structural improvements (driveways, fences, retaining walls), but not to the land value. For an investment property purchased for $800,000 where the building component is valued at $500,000, the annual capital works deduction would be $12,500 (2.5% × $500,000).
Unlike plant and equipment depreciation, capital works deductions were not affected by the 2017 changes for second-hand properties — you can still claim capital works deductions on the original construction cost regardless of whether you are the first or subsequent owner. However, you need to know the actual construction commencement date and construction cost, which a quantity surveyor can estimate based on building plans, council records, and construction cost guides.
Related Terms
Depreciation (Rental Property)
Tax deductions for the declining value of a rental property's building structure and plant & equipment (fixtures and fittings).
Negative Gearing
When the costs of owning an investment property (interest, expenses) exceed the rental income, creating a tax-deductible loss.
Cost Base
The total cost of acquiring and holding an asset, used to calculate the capital gain or loss on disposal.
Rental Income
Income received from renting out a property, which must be declared as assessable income in your tax return.