If you own an investment property and you're not claiming depreciation, you're almost certainly leaving money on the table. We're talking thousands of dollars a year - legally yours - that most investors either don't know about or can't be bothered chasing.
Last updated: April 2026 · ATO-aligned · General information only 8 min read
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When a building ages, its structure and fittings gradually wear out. The ATO recognises this and allows investment property owners to claim that decline in value as a tax deduction each year - without spending a single dollar in the year of the claim. It's a non-cash deduction, which makes it one of the most powerful tools available to property investors.
There are two categories, governed by two separate parts of the tax law: Division 43 covers the building itself, and Division 40 covers the plant and equipment inside it. Understanding the difference - and the rules that apply to each - is essential to claiming correctly.
Division 43, also called capital works, covers the structural elements of the property: walls, floors, roof, windows, built-in cabinetry, sinks, driveways, and anything else permanently fixed to the building.
The rate is simple: 2.5% per year, for 40 years, calculated on the original construction cost - not what you paid for the property.
Example
Original construction cost: $400,000
Annual Division 43 deduction: $10,000 per year ($400,000 × 2.5%)
You can claim this for up to 40 years - regardless of when you bought the property, and regardless of what you paid for it. You don't need to have built it. You just need to have bought a property built after July 1985.
Capital works make up the lion's share of most depreciation claims. BMT Tax Depreciation report that Division 43 typically represents 85–90% of a total depreciation claim - which is why it's available on second-hand properties is so important. As long as construction started after July 1985, you can claim it.
Division 40 covers removable or mechanical assets inside the property: carpet, blinds, dishwashers, ovens, air conditioning units, hot water systems, exhaust fans, smoke alarms, and over 6,000 other ATO-recognised items.
Unlike the flat 2.5% on the building, each asset has its own effective life set by the ATO, and you depreciate it over that period. Here are some common items:
| Asset | ATO effective life |
|---|---|
| Carpet | 10 years |
| Blinds / curtains | 6 years |
| Dishwasher | 10 years |
| Air conditioner (split system) | 10 years |
| Hot water system | 12 years |
| Smoke alarm | 6 years |
| Oven / cooktop | 12 years |
The 2017 rule change - second-hand properties
Since May 2017, if you buy a second-hand residential property, you can only claim Division 40 on new assets you install yourself - not the existing plant and equipment already in the property. However, Division 43 (the building structure) is still fully claimable on second-hand properties built after 1985. This is why Division 43 makes up such a large proportion of claims on established properties.
For Division 40 (plant and equipment), the ATO gives you a choice of two methods for calculating how much you can claim each year. Division 43 always uses prime cost at the fixed 2.5% rate - no choice there. For all removable assets inside the property, you pick one method and apply it consistently.
Prime cost (straight-line)
The prime cost method spreads the deduction evenly over the asset's effective life.
Annual deduction = Asset cost × (100% ÷ effective life)
Example: $9,000 carpet with 10-year effective life → $900 per year for 10 years
Diminishing value
The diminishing value method front-loads the deductions. Instead of applying the rate to the original cost each year, you apply it to the remaining written-down value. The ATO sets the rate at 200% divided by the effective life, so a 10-year asset has a rate of 20%.
Annual deduction = Opening value × (200% ÷ effective life)
Example: $9,000 carpet, 10-year life, rate = 20%
| Year | Opening value | Deduction (20%) | Closing value |
|---|---|---|---|
| Year 1 | $9,000 | $1,800 | $7,200 |
| Year 2 | $7,200 | $1,440 | $5,760 |
| Year 3 | $5,760 | $1,152 | $4,608 |
| Year 4 | $4,608 | $922 | $3,686 |
| Year 5 | $3,686 | $737 | $2,949 |
Both methods claim the same total amount over the full effective life - the difference is purely when you get the money.
Which method should you choose?
Most investors go with diminishing value because it delivers bigger deductions in the early years of ownership, when holding costs are often highest. The time value of money matters here - $1,800 in your pocket today is worth more than $900 spread evenly over two years.
Prime cost can make sense if you expect your income - and therefore marginal tax rate - to rise significantly in the future, or if you simply prefer steady, predictable deductions. Your accountant can run the numbers both ways. One important rule: once you choose a method, you must stick with it for all assets in that property.
Low-value pooling
Under the diminishing value method, any asset with an original cost under $1,000 (or whose written-down value drops below $1,000) can be transferred into a low-value pool. The pool is then depreciated at a flat 37.5% per year on the opening pool balance - which accelerates the deduction and simplifies the paperwork for smaller items. Assets under $300 can be written off immediately in full.
The numbers depend on the property type, age, and what's inside it. Here's a realistic picture:
$15,000+
Average first-year claim on a brand new property
~$8,000
Average first-year claim on an established / second-hand property
$5,000+
Average first-year claim on older properties (pre-1987 with renovations)
The ATO's own data for FY22–23 shows the average depreciation claim across all residential investment properties was around $3,905 - but that low figure reflects the large number of investors who either don't have a proper schedule or are dramatically underclaiming. Investors who engaged specialist quantity surveyors like BMT averaged more than $8,900 for the same year, with their FY24–25 data showing an average of $12,105.
The difference between the average ATO claim and what specialist quantity surveyors achieve for their clients is enormous - and it's all legally yours to claim.
Yes - if you want to claim Division 43 (capital works), the ATO requires a schedule prepared by a qualified quantity surveyor. You cannot self-assess it. You need someone who physically inspects the property and calculates the deductible value.
The good news: the cost of the report is itself tax deductible, and it's a one-time cost - not an annual one. A typical schedule for a residential investment property costs $400–$800. Given that first-year deductions routinely exceed $5,000–$15,000, it almost always pays for itself many times over in the first year alone.
What a depreciation schedule includes
BMT Tax Depreciation is Australia's most well-known specialist in this area, preparing schedules for over 20 years across residential and commercial properties Australia-wide. A typical schedule covers 40 years of deductions, includes both Division 40 and Division 43 breakdowns, and shows both diminishing value and prime cost methods so you can make an informed choice with your accountant.
Depreciation isn't entirely free money - there's a trade-off when you sell. Division 43 deductions you've claimed reduce your cost base for CGT purposes, which means a higher capital gain when you eventually sell. Division 40 assets each have their own written-down value at the time of sale.
The critical point is this: the tax savings from depreciation arrive now, at your current marginal rate. The additional CGT on sale arrives later - potentially decades away - and at the discounted 50% CGT rate if you've held the property for more than a year. In almost every scenario, claiming the deductions makes financial sense.
The trade-off in plain terms
| Tax saving from depreciation | Arrives now - at your full marginal rate (up to 47%) |
| Additional CGT on sale | Arrives later - at the 50% discounted CGT rate if held 12+ months |
In almost every scenario, the time value of getting the tax saving now outweighs the deferred CGT cost. Always confirm with your accountant for your specific situation.
When you model an investment property in Canwi, you can factor in your annual depreciation claim as part of the cashflow picture. This matters because depreciation reduces your taxable income - which flows through to your actual tax bill, your cashflow position, and your overall net worth trajectory over time.
Canwi uses a fixed annual depreciation amount rather than modelling the year-by-year curve of diminishing value versus prime cost. In practice this works well for most planning purposes: the Division 43 component - which makes up 85–90% of most claims - is a fixed annual amount, and the diminishing value curve on Division 40 assets tends to flatten out after the first few years anyway.
The best workflow
Get your depreciation schedule done by a qualified quantity surveyor.
Use the Year 1 total claim as your starting figure in Canwi.
For a conservative long-run estimate, use your Division 43 amount only - since that's stable for 40 years.
Refine as your actual tax returns confirm the real numbers each year.
Getting the depreciation number right is one of the inputs that can meaningfully change your projections. A $10,000 annual deduction at a 37% marginal tax rate is $3,700 back in your pocket - every year - for up to 40 years.
Model your investment property in Canwi
Canwi lets you model an investment property as a life event - including rental income, mortgage repayments, depreciation, and the eventual CGT on sale - and see how it all flows through to your cashflow and net worth over time. If you haven't yet had a depreciation schedule done, it's worth requesting a quote from BMT Tax Depreciation or your preferred quantity surveyor. Then plug the numbers into your Canwi plan and see what difference it makes to your long-term financial position.
Property depreciation is one of the most valuable, most underused deductions available to Australian investors. It's legal, it's ATO-endorsed, and it can add thousands to your cashflow every year.
The two things to remember:
Get a depreciation schedule done by a qualified quantity surveyor, send it to your accountant, and make sure the annual deduction is feeding into your financial plan. We have no relationship with BMT Tax Depreciation - https://www.bmtqs.com.au/ other than Jonno using them for a depreciation schedule on his investment property - but they seem to be the largest in this space if you're looking for someone to talk to about this.
General information only. This article provides general educational information about property depreciation and does not constitute financial or tax advice. Depreciation rules are complex and depend on individual circumstances, property type, and purchase date.