Investment Property Depreciation in Australia: Div 40 vs Div 43
The deduction that costs you nothing in cash. How capital works and plant & equipment depreciation work, the 2017 second-hand rule, three worked examples, and when a quantity surveyor schedule pays for itself.
Depreciation is the only big investment property deduction that costs you nothing in cash each year. The building wears out on paper, the ATO lets you claim that wear against your income, and the money stays in your pocket. On a new townhouse it is commonly worth $10,000 to $15,000 in deductions in the first year.
It is also the deduction most often missed. Many investors in older properties assume there is nothing to claim. Often there is, as long as you understand the two divisions and the 2017 rule change.
The two types of depreciation
Division 43: capital works (the building)
The structure itself: walls, roof, floors, built-in cabinetry, windows, driveways and fences. For residential buildings where construction started after 15 September 1987, you can claim 2.5% of the original construction cost every year for 40 years.
Key point: it is the construction cost, not what you paid. If you buy a 2010-built apartment for $700,000 and it cost $280,000 to build, you claim 2.5% of $280,000 each year until 2050, even though you are the third owner. Renovations done by previous owners after 1987 also qualify, even if the original house is older.
Division 40: plant and equipment (the fittings)
Removable or mechanical items: hot water systems, air conditioners, ovens, dishwashers, carpets, blinds, smoke alarms. These depreciate over their ATO-set effective life, usually 5 to 20 years, so the deductions are front-loaded.
The 2017 rule that changed everything
For residential properties bought after 7:30pm on 9 May 2017, individual investors can no longer claim Division 40 on previously usedplant and equipment. If you buy an established apartment, you can't depreciate the existing oven, carpet or air conditioner.
- Still claimable: Division 43 capital works on any qualifying building
- Still claimable: new plant and equipment you buy and install yourself
- Still claimable: all plant and equipment in a brand-new property no one has lived in
- Not claimable: existing fittings in an established property bought after the cut-off
Worked examples
New $750,000 townhouse
Construction cost component of $350,000. Brand-new, so both divisions are available.
At a 37% marginal rate plus 2% Medicare levy, $14,750 in deductions is worth about $5,750 in tax back in year one, or around $110 a week. That can be the difference between a property costing you money each week and paying for itself. Our negative gearing guide shows how this flows through.
Established 2005-built house, bought 2026
Original construction cost estimated at $250,000. Because it was bought after May 2017, only Division 43 applies to the existing building.
1970s brick house with a 2015 renovation
The original structure pre-dates September 1987, so it can't be claimed. But a $90,000 kitchen and bathroom renovation done in 2015 qualifies as capital works: $2,250 a year until 2055. Most owners of older properties don't know this.
Getting a depreciation schedule
The ATO requires a qualified estimator to determine construction costs when you don't have the original build records. In practice that means a tax depreciation schedule from a quantity surveyor.
- Typical cost: $500 to $900, and the fee itself is tax deductible
- Usually includes a site inspection
- Covers up to 40 years, so you only buy it once per property
- Your accountant uses it to claim each year's figure
- If you missed claims, you can usually amend the past two years of returns
The trade-off on sale
Division 43 deductions reduce your cost base for capital gains tax. In plain terms, you claim the deduction now at your full marginal rate, then pay some of it back when you sell, but at the discounted CGT rate and years later. For most investors this is a clear win. The detail is in our CGT guide.
Depreciation helps. Location matters more.
Tax benefits improve the cash flow of a good investment. They don't rescue a bad one. Check the rental demand, yield and wealth profile of any postcode before you look at the depreciation estimate. Every PropPulse report shows net yield and estimated weekly cash flow. Run the numbers in our rental yield calculator or get a free report.