Property Depreciation: Division 43 and Division 40 Explained

Depreciation lets the owner of an income-producing property claim the gradual loss in value of the building and its assets as a tax deduction each year.

For a rental property it falls into two parts of the income tax law: Division 43 capital works, which covers the building's structure and permanently fixed items, and Division 40 plant and equipment, which covers removable, mechanical assets. The two are mutually exclusive, so an item deductible as capital works under Division 43 is not also claimed under Division 40.

Depreciation can only be claimed for the periods the property is used to produce income, not for private use.

Capital works deductions cover the building's structure and items permanently fixed to it, such as walls, the roof, floors and built-in fixtures. They are worked out from the original construction cost, not the purchase price, and can be claimed even where a previous owner did the building work. The ATO sets out the rules on its page Work out your capital works deductions.

For residential property the rate and period depend on when construction commenced: construction that commenced between 18 July 1985 and 15 September 1987 is claimed at 4% per year over 25 years, and construction that commenced on or after 16 September 1987 is claimed at 2.5% per year over 40 years, each starting from the date construction was completed.

Residential buildings qualify only where construction commenced after 17 July 1985, so the original structure of an older home cannot be claimed, although later qualifying renovations and extensions can be.

Capital works deductions were not affected by the 2017 changes described below.

Plant and equipment are removable or mechanical assets with a limited effective life, for example carpet, blinds, dishwashers, ovens, air conditioning units and hot water systems.

Their decline in value is claimed over the asset's effective life using one of two methods: the diminishing value method, which applies 200% divided by the effective life to the asset's remaining value and gives larger deductions in the early years, or the prime cost method, which applies 100% divided by the effective life to the original cost and gives a uniform deduction each year.

An asset costing $300 or less that is not used in a business can be written off immediately for its full cost, and assets costing less than $1,000 can be placed in a low-value pool and depreciated together at a diminishing value rate of 37.5%.

Since 7:30pm AEST on 9 May 2017, an individual generally cannot claim the decline in value of second-hand or previously used plant and equipment in a residential rental property. This was introduced by the Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (Act No. 126 of 2017) and applies to the used assets that come with an established property, such as existing carpets, blinds and appliances, or assets previously used in a private home.

Decline in value can still be claimed for brand-new assets the investor buys and installs, for assets in a brand-new residential property bought as the first owner, and where the property or the asset was acquired before 7:30pm on 9 May 2017 and the property was rented before 1 July 2017.

The restriction also does not apply to excluded entities, such as companies, super funds other than self-managed super funds, public unit trusts and managed investment trusts, or an entity carrying on a business of letting residential property, and it does not apply to commercial property.

Division 43 capital works deductions are not affected by this restriction.

The two divisions are treated differently when the property is sold.

Capital works deductions claimed or claimable under Division 43 reduce the property's CGT cost base, which increases the capital gain on sale. The ATO sets out this interaction on its page Rental properties 2025: Other tax considerations: amounts deducted or claimable are excluded from the cost base, so the benefit of the yearly capital works deduction is partly recovered as a larger capital gain later.

Division 40 plant and equipment does not reduce the CGT cost base; it is dealt with on disposal through a balancing adjustment under the depreciation rules rather than through CGT.

Where a capital works amount was not able to be deducted, for example during a period of private use, the cost base is not reduced by that amount.

Depreciation is part of the income tax rules and is not changed by the 2026 CGT reform, and the 2017 second-hand restriction is a separate, earlier change that remains in place.

The reform touches depreciation only through the cost base. Because capital works deductions reduce the cost base and increase the eventual gain, a sale on or after 1 July 2027 taxes that larger gain under the new rules set by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49 of 2026, royal assent 26 June 2026): cost base indexation and the higher of the marginal rate or 30%, rather than the former 50% discount.

The yearly deductions still reduce rental income during ownership, but the gain they help create is taxed differently from 1 July 2027, so the long-standing view of capital works as a straightforward saving is weaker.

To see how a gain is worked out, including a sale that straddles 1 July 2027, use the CGT Calculator.

Example only. An investor owns a residential rental property built in 2000 with $300,000 of original construction cost. The capital works deduction at 2.5% is $7,500 a year, claimable for the periods the property is rented.

If the investor buys a new oven and dishwasher, those new assets can be depreciated under Division 40 over their effective lives, but the used carpet and blinds that came with the property cannot, because the property was bought after 9 May 2017.

When the property is later sold, the capital works deductions claimed reduce the cost base, so the capital gain is larger than the simple sale price less purchase price. To estimate the deductions, use the Depreciation calculator, and to estimate the tax on the gain once the cost base is known, use the CGT Calculator.

What is the difference between Division 43 and Division 40?

Division 43 covers the building's structure and fixed items at a set rate over 40 years; Division 40 covers removable plant and equipment over each asset's effective life.

Can depreciation be claimed on an older property?

The original structure of a residential building only qualifies for capital works if construction commenced after 17 July 1985, but later renovations and any eligible plant and equipment can still be claimed.

Can used appliances that came with a rental be claimed?

Generally no, if the property was bought after 7:30pm on 9 May 2017 as an established residential property. New assets bought and installed after purchase can still be depreciated.

Does claiming capital works increase capital gains tax?

Yes. Capital works deductions reduce the cost base, so the capital gain on sale is larger.

Did the 2027 reform change depreciation?

No. Depreciation is unchanged. The reform changes how a taxable gain is calculated from 1 July 2027, and capital works deductions feed into that gain through the cost base.