Property depreciation: how investors maximise tax deductions (2026)

What property depreciation is

In Australia, investment property owners can claim a tax deduction for the gradual wear and tear of a property’s structure and its internal fittings. This is called depreciation, and it is one of the most valuable (and commonly overlooked) tax deductions available to property investors.

Depreciation is a non-cash deduction, you do not physically spend money to claim it. The ATO allows you to deduct the theoretical decline in value of the property’s components over time, reducing your taxable income and therefore your annual tax bill.

There are two categories of property depreciation:

• Division 43, Capital Works Deduction (building structure)
• Division 40, Plant and Equipment (removable fixtures and fittings)

Division 43: capital works deduction

Division 43 covers the structural components of the building itself, walls, floors, roof, windows, built-in wardrobes, plumbing, wiring within the structure, and other permanent components.

Example: a residential property built in 2010 with construction costs of $400,000:

• Annual Division 43 deduction: $400,000 × 2.5% = $10,000/year
• Available for 40 years from construction commencement
• Remaining years available depends on construction date and when you purchased

If you buy an established property, you inherit the remaining depreciation life. For example, if the building is 15 years old when you buy it, you have approximately 25 years of Division 43 deductions remaining. A quantity surveyor can calculate the precise deductible amount.

Properties built before 16 September 1987 are not eligible for Division 43 deductions, regardless of when you purchased them. This excludes many older inner-city terrace houses, period homes, and pre-war properties.

Division 40: plant and equipment

Division 40 covers assets that can be physically removed from the property, items that are not structurally part of the building. Common examples:

The ATO sets the effective life for each asset type. Depreciation can be claimed using either the diminishing value method (front-loaded, higher deductions in early years) or the prime cost method (straight-line, equal deductions each year). The diminishing value method generally provides higher early-year deductions and is used by most investors.

Who can claim depreciation?

Any investor who:

• Owns a rental property (or property available for rent)
• Derives rental income from the property
• Has an eligible property (construction commenced after 16 September 1987 for Division 43)

Importantly, depreciation is only available on investment properties, not your own home (principal place of residence). If a property switches between personal use and investment use, the depreciation entitlement is adjusted proportionally.

The 2017 rule change: second-hand plant and equipment

A significant rule change took effect on 9 May 2017 (Budget night) that affects Division 40 claims on existing (second-hand) properties.

Under the new rules:

• If you purchased an established residential property after 9 May 2017, you cannot claim Division 40 depreciation on the existing plant and equipment in the property (carpet, blinds, appliances, etc.) unless you installed them yourself as new assets.
• New plant and equipment you purchase and install yourself (after buying the property) can still be depreciated under Division 40.
• Division 43 (capital works) is unaffected by this rule change, you can still claim 2.5% on the original construction cost regardless of when you purchased the property.
• New properties are unaffected, if you buy a brand new property (from the developer, never previously occupied as a residence), you can claim Division 40 on all plant and equipment.

Quantity surveyor report

A tax depreciation schedule prepared by a qualified Quantity Surveyor (QS) is the standard way to maximise and substantiate your depreciation claims. The ATO accepts QS reports as evidence of the cost of capital works and the value of plant and equipment.

What a depreciation schedule includes:

• Estimated original construction cost (for Division 43)
• Itemised list of plant and equipment with values and effective lives (for Division 40)
• Year-by-year depreciation schedule for the next 40 years
• Both diminishing value and prime cost methods shown

Cost of a QS depreciation schedule:

• Residential properties. $500 to $800 for an initial schedule
• Commercial properties. $700 to $1,500+

The QS fee itself is tax deductible as an expense of managing your investment property. Given that the schedule can generate tens of thousands of dollars in deductions over its lifetime, the cost is almost always worth it.

Well-known ATO-recognised QS firms include BMT Tax Depreciation, Washington Brown, and MCG Quantity Surveyors, but there are many others. Your accountant or property manager can usually recommend a local firm.

Worked example

Scenario. An investor purchases a new 3-bedroom house in 2026 for $650,000. The land is valued at $280,000 and the construction cost is $370,000. The property is rented at $650 a week and generates $33,800 a year in rental income. The investor earns $150,000 from their job and is in the 37% tax bracket.

Over the 40-year life of the property, the cumulative Division 43 deductions alone would total $370,000 (i.e. the full construction cost). At a 37% marginal rate, that represents $136,900 in total tax savings, from a single non-cash deduction.

New vs established properties

New properties offer significantly higher depreciation deductions than established properties, for several reasons:

• Full Division 43 remaining. A new property has the full 40-year capital works schedule ahead of it. An established 20-year-old property has only 20 years remaining (and therefore half the deductible life).
• Full Division 40 available. New properties allow Division 40 claims on all plant and equipment. Established properties purchased after 9 May 2017 cannot claim Division 40 on existing assets.
• Higher construction costs. Recently built properties generally have higher construction costs (due to inflation and higher building standards), resulting in higher Division 43 deductions.

How to claim in your tax return

Depreciation deductions are claimed in your annual income tax return under the “rental income and expenses” section:

• Division 43 is typically claimed as “Capital works deductions” in the rental schedule.
• Division 40 is claimed as “Decline in value of depreciating assets”.
• Your QS depreciation schedule shows the exact amounts to claim for each year.
• Your tax agent will use these figures when preparing your return.

Depreciation can also convert a positively geared property into a negatively geared one on paper, creating a tax loss that can be offset against your other income. This is one of the core mechanisms behind negative gearing tax benefits. See our Negative Gearing Guide for more detail.