Rental Property Depreciation Basics (Australia 2025-26)

General information only. Speak with a registered tax agent for advice.

Depreciation is a non-cash deduction — you don’t spend anything in the year you claim it, but it reduces your taxable income all the same. For a typical new apartment, depreciation can add $8,000–$15,000 in deductions per year on top of your cash expenses. Understanding the two separate depreciation systems — and the 2017 rule change — is essential for any rental property investor.

Two types of depreciation

Australian tax law splits rental property depreciation into two distinct categories, each governed by a different division of the ITAA 1997.

Division 40 — Plant and equipment (decline in value)

Division 40 covers removable or replaceable assets: carpet, blinds, dishwashers, air conditioners, hot water systems, ceiling fans, ovens, rangehoods. These items have their own effective lives published by the ATO in Tax Ruling TR 2024/3.

You can use either of two methods:

• Diminishing value: applies a fixed percentage to the declining book value each year. Produces larger deductions in the early years.
• Prime cost: applies a fixed percentage to the original cost each year. Even deductions over the asset’s life.

The 2017 rule change. From 1 July 2017, Division 40 deductions on second-hand residential property are only available for assets that you installed or acquired new. If you buy an established property with existing carpet, blinds, or appliances, you cannot depreciate those items. This rule was introduced to stop investors claiming depreciation on assets that had already been partially depreciated by a previous owner.

New properties are not affected — all plant and equipment in a newly built property is available for Division 40, because no previous owner has claimed it.

Short-term rental arrangements are also exempt from the restriction if the property qualifies as a commercial residential premises (e.g., certain serviced apartments).

Division 43 — Capital works (building write-off)

Division 43 covers the building structure itself and structural improvements: walls, roof, floors, built-in cupboards, concrete paths, fences, retaining walls, extensions. The rate is a flat 2.5% per year over 40 years (or 4% over 25 years for certain industrial buildings).

Key conditions:

• Construction must have commenced after 16 September 1987. Buildings constructed before this date do not qualify.
• The 2017 rule change does not apply to Division 43 — you can claim the building write-off on second-hand properties as long as the construction date qualifies.
• If you carry out structural improvements yourself (e.g., you add a deck or renovate the bathroom), your capital works deduction starts from when those works are completed.
• When you sell the property, the Division 43 deductions you have claimed reduce your cost base for CGT purposes.

Division 40 vs Division 43 at a glance

Feature	Division 40	Division 43
What it covers	Plant and equipment (removable items)	Building structure and fixed improvements
Rate	Varies by effective life (ATO TR 2024/3)	2.5% flat per year
Calculation method	Diminishing value or prime cost	Straight line only
Second-hand restriction	Yes — only items YOU installed (post-2017)	No restriction
Construction date requirement	No	Must start after 16 September 1987
CGT cost base impact	Deductions reduce cost base	Deductions reduce cost base

Do you need a quantity surveyor?

For Division 43, you need a construction cost schedule — either from the original builder or from a registered quantity surveyor (QS). For second-hand properties, only a QS can estimate the original construction cost. The ATO accepts QS reports as substantiation.

The fee for a QS report typically runs $500–$800 for a standard residential property, and the fee itself is tax-deductible in the year you pay it.

Worked example: new apartment

You purchase a new apartment for $600,000. The contract identifies the building value as $400,000 (land value: $200,000).

Division 43 — building write-off: $400,000 × 2.5% = $10,000 per year

Division 40 — plant and equipment (sample items, Year 1, diminishing value method):

Asset	Cost	Effective life	DV rate	Year 1 deduction
Carpet	$4,000	8 years	25%	$1,000
Blinds	$2,000	10 years	20%	$400
Dishwasher	$1,500	10 years	20%	$300
Air conditioner	$3,000	10 years	20%	$600
Hot water system	$2,000	12 years	16.67%	$333

Year 1 Division 40 total: ~$2,633

Total depreciation Year 1: ~$12,633

At a 37% marginal rate, this saves you $4,674 in tax — without spending a dollar of additional cash. Over 10 years the cumulative tax saving from depreciation alone can exceed $30,000.

Common mistakes

Claiming Division 40 on second-hand items you didn’t install. This is one of the most common errors in rental property returns since 2017. If you bought an established property, the carpet and appliances that were there when you settled are not deductible under Division 40.

Missing the construction date cutoff. If the building was constructed before 17 September 1987, there is no Division 43 deduction. Buying a “renovated” 1975 cottage does not reset the clock — only the cost of the renovations you carry out qualifies.

Not getting a QS report for second-hand properties. Without a construction cost schedule, you cannot substantiate your Division 43 claim. Don’t estimate — the ATO requires documentation.

Forgetting that Division 43 reduces your cost base. When you eventually sell, every dollar of Division 43 you’ve claimed reduces your CGT cost base, which increases your capital gain. Factor this into your long-term projections.

Using the wrong effective life. Effective lives are set by ATO TR 2024/3. Don’t guess — look up the exact asset category in the ruling.

Key takeaways

• Division 40 covers removable plant and equipment; Division 43 covers the building structure.
• Since 1 July 2017, Division 40 is only available for items you personally installed in second-hand residential properties.
• Division 43 (2.5% per year) is available for second-hand properties built after 16 September 1987.
• A quantity surveyor report is essential for second-hand properties — the fee is deductible.
• Both Division 40 and Division 43 deductions reduce your CGT cost base on sale.

ATO sources

• Rental properties — depreciation and capital allowances
• TR 2024/3 — effective life of depreciating assets
• Division 43 capital works deductions

Next step

• Forecast after-tax outcomes with the Investment Property Calculator
• Check disposal impact in the CGT Calculator