If you own a rental property and are not claiming depreciation, you could be missing deductions you are entitled to claim.
Investment property depreciation generally falls into two categories: Division 40, which covers the decline in value of eligible depreciating assets, and Division 43, which covers certain construction expenditure and capital works.
The rules are different for each category, and the amount you can claim depends on the property, when construction began, how the property is used and, for some assets, when you acquired them.
A well-prepared depreciation schedule can help identify eligible deductions and give your accountant the information needed to claim them correctly each year.
Div 40 vs Div 43: What Is the Difference?
The easiest way to understand investment property depreciation is to separate the building itself from depreciating assets within or attached to it.
| Division 40 | Division 43 | |
|---|---|---|
| What it covers | Eligible depreciating assets | Qualifying construction expenditure and capital works |
| Examples | Appliances, carpets, blinds and certain equipment | Building structure, extensions, renovations and structural improvements |
| How deductions are calculated | Decline in value based on the asset and applicable effective life/method | Applicable capital works rate and eligible construction expenditure |
| Typical residential treatment | Asset-specific | Often 2.5% over 40 years, but the rate and period can vary |
| Second-hand residential property | Restrictions can apply to previously used assets | Capital works deductions can generally continue where the legal requirements are met |
Division 40 — Plant and Equipment
Division 40 generally covers depreciating assets that have a limited effective life, such as appliances, carpets, blinds and certain equipment.
The deduction is based on the asset’s decline in value and the applicable depreciation rules.
For established residential investment properties, an important restriction applies to certain previously used depreciating assets acquired after 1 July 2017. In many cases, an individual investor cannot claim depreciation on those previously used assets, although exceptions apply — including certain business and excluded-entity situations.
Division 43 — Capital Works
Division 43 covers certain construction expenditure relating to buildings, extensions, alterations, improvements and structural improvements.
For many residential rental properties, qualifying capital works are deducted over 25 or 40 years, depending on the type of construction and when construction began. The familiar 2.5% rate over 40 years applies to many modern residential properties, but it is not a universal rate.
This distinction matters because the same renovation or purchase can contain both Division 40 and Division 43 components.
Do You Need a Depreciation Schedule?
A depreciation schedule is a detailed report identifying eligible depreciating assets and qualifying capital works in a property and calculating the deductions available over time.
A quantity surveyor’s report is not legally mandatory in every situation. For example, where actual construction expenditure can be established, that actual cost is generally used for Division 43 purposes.
Where a new owner cannot genuinely determine the construction expenditure, the ATO allows an estimate from an appropriately qualified person, such as a quantity surveyor, supervising architect, suitably experienced builder or clerk of works.
In practice, a professional depreciation schedule can make the process much easier because it can identify deductions that are easy for an investor to overlook. It can also be useful when:
- the property was built or renovated before you bought it
- you do not have the original construction records
- the property contains numerous depreciating assets
- you have completed renovations or improvements
- you want a clear record to give your accountant each year.
The report should then be updated or reviewed when significant improvements, replacements or additional assets are added.
How to Calculate Depreciation on a Rental Property
You do not calculate depreciation by simply applying a percentage to the property’s purchase price.
i) Division 43
For capital works, the deduction is based on eligible construction expenditure, not the value of the land or the amount you paid for the property.
For many modern residential properties, the applicable rate is 2.5% per year over 40 years.
For example, if eligible construction expenditure is $320,000:
$320,000 × 2.5% = $8,000 per year
The deduction may then need to be apportioned for the period the property was used to produce rental income or was genuinely available for rent.
The applicable rate and deduction period can vary depending on the type of construction and when construction began.
ii) Division 40
Division 40 assets are treated separately.
The deduction is based on the asset’s decline in value, its applicable effective life and the depreciation method available to the taxpayer.
This is why a professional depreciation schedule can be useful: it separates the assets, applies the appropriate treatment and provides a year-by-year calculation for your accountant to review.
What Qualifies for a Division 43 Capital Works Deduction?
Capital works deductions can apply to qualifying construction expenditure such as:
- building construction and extensions
- structural alterations
- renovations involving qualifying construction work
- pergolas, patios and similar structures
- retaining walls
- sealed driveways
- certain other structural improvements.
The ATO states that residential capital works deductions are generally spread over 25 or 40 years, depending on the type of construction and when the construction began.
What Does Not Qualify as Division 43?
Not every property expense is a capital works deduction. For example:
- ordinary repairs and maintenance may be immediately deductible
- depreciating assets may fall under Division 40 instead
- land is not depreciable
- landscaping generally does not form part of Division 43 construction expenditure.
There is also an important distinction between a repair and an initial repair.
A repair to damage or deterioration that occurs while you own the rental property may generally be deductible as a repair. However, the cost of fixing defects, damage or deterioration that already existed when you acquired the property is generally treated as capital rather than an immediate repair deduction.
Getting this classification right matters because the same renovation project can contain repairs, depreciating assets and capital works, each with different tax treatment.
How KSH TAX Uses Your Depreciation Schedule
At KSH TAX, we don’t treat a depreciation schedule as a document that gets filed away and forgotten.
When preparing a rental property tax return, we review the current-year depreciation figures and consider how they interact with your rental income, other deductible expenses and overall tax position.
We also look at changes made during the year.
For example, a renovation may contain:
- an immediate repair deduction
- new Division 40 assets
- new Division 43 capital works.
That classification can affect when the deduction is available and how it is calculated.
Our Property Tax service covers depreciation alongside rental-property deductions, negative gearing, CGT and ownership-structure considerations.
You can also use our Investment Property & Negative Gearing Calculator to get an initial picture of how rental income, expenses and depreciation can affect your property’s cash flow and tax position.
New vs Established Properties: What Changes?
The treatment of depreciation can differ significantly between a newly built property and an established residential property.
New or substantially renovated properties
Where the relevant requirements are met, investors can generally claim depreciation on eligible Division 40 assets and Division 43 capital works.
The exact deductions still depend on the assets, construction expenditure, ownership circumstances and the applicable rules.
Established residential properties
The rules changed from 1 July 2017.
For many individual investors who acquire established residential rental property, deductions for the decline in value of previously used Division 40 assets are restricted.
However, eligible Division 43 capital works deductions can still be available where the construction expenditure and other requirements are satisfied.
This is one reason established properties should not be treated as having “no depreciation” simply because they are second-hand.
Commercial property and business use
The 2017 restriction is specific to certain residential rental situations. Commercial property and property used in carrying on a business can be subject to different rules.
That means you should not automatically apply the residential second-hand-property rules to a commercial building, business premises or an SMSF-owned commercial property.
For SMSF property, depreciation is only one part of the equation. The fund also has separate investment, tax and compliance obligations.
Common Investment Property Depreciation Mistakes
- Not obtaining enough information about the property’s construction: Investors sometimes assume an older property has no useful depreciation left. That can mean missing eligible Division 43 deductions.
- Claiming Division 40 on restricted second-hand assets: The 2017 rules can prevent individual investors from claiming deductions for certain previously used depreciating assets in established residential rental properties.
- Assuming every renovation is immediately deductible: A renovation can include repairs, depreciating assets and capital works. The tax treatment depends on what was actually purchased or constructed.
- Forgetting to update the depreciation records: New renovations, replacement assets and structural improvements can create additional deductions and should be reviewed rather than ignored.
- Ignoring the CGT consequences: Capital works deductions claimed or available can affect the property’s cost base when you eventually sell.
Get Your Investment Property Depreciation Right
Depreciation is only one part of your rental property’s tax position, but getting it right can make a meaningful difference to your annual deductions.
KSH TAX works with property investors to review depreciation, rental expenses, negative gearing, CGT and ownership structures as part of the broader tax picture.
If you already have a depreciation schedule, we can work with it. If you don’t, we can help you understand what information is needed and whether obtaining a professional schedule makes sense for your property.
To discuss your situation, book a free consultation or call us at 08 6285 8110.
