Two different capital deductions often arise on a rental property. Capital works deductions, sometimes called Division 43, cover construction costs for the building and certain structural improvements. Deductions for the decline in value of depreciating assets, sometimes called Division 40 or plant and equipment, cover items such as carpets, curtains, appliances and furniture that are not part of the building itself.

They are not the same as repairs, and they are not a deduction for the purchase price of the land. The Australian Taxation Office (ATO) also limits decline-in-value claims for many second-hand assets in residential rentals acquired at or after 7:30pm AEST on 9 May 2017. Getting the split wrong is a common way to over-claim.

This explainer follows the ATO capital works page, last updated 22 June 2026, and the depreciating assets page, last updated 21 May 2026, including the official Meg and Laura examples. It sits with rental income tax, how negative gearing works and the CGT calculator.

This is general information only. It is not personal tax advice, and it is not a depreciation schedule.

Capital works: the building, not the land

You can claim a capital works deduction for certain construction costs, including some alterations, extensions and structural improvements, for periods during the year when the property is used for income-producing purposes. You cannot claim for a period of personal use.

As a general rule, you can claim for 40 years from the date construction was completed, at 2.5% a year, for residential construction that started after 15 September 1987. A 4% rate, over 25 years, applies to some earlier construction, and to some short-term traveller accommodation. The ATO publishes a table of commencement dates and rates by type of construction. You can start claiming only when construction is completed, and the deductions cannot exceed the construction expenses.

The construction cost is not the purchase price, the insured cost or the replacement cost. If you were an owner-builder, the value of your own labour and any notional profit margin is not part of the construction cost.

If you do not have precise documents, you can obtain an estimate from a quantity surveyor or another independent qualified person, such as a supervising architect or an experienced builder. The fee for that estimate is deductible in the income year you pay it. A quantity surveyor report can also include a schedule of depreciating assets.

Capital works deductions reduce the cost base of the property for capital gains tax. If you claim them, you have to take that into account when you later sell. If you are a vendor disposing of capital works begun after 26 February 1992, and you were able to claim a deduction for those works, the ATO says you should provide the buyer with a capital works notice, generally within six months after the end of the income year of disposal.

The official Meg example

On 1 March 2026, Meg bought a rental property for $700,000 and rented it out immediately. A quantity surveyor reported that construction of the residential townhouse started in February 2005, finished in November 2005, and cost an estimated $500,000.

Because construction started after 15 September 1987, the rate is 2.5%. The annual deduction is $500,000 times 2.5%, which is $12,500. The property was used to produce income for 122 days in 2025-26, so Meg's claim for that year is $12,500 times (122 divided by 365), which is $4,178.

Depreciating assets: plant, furniture and fittings

Depreciating assets are items that can be described as plant and that do not form part of the premises. The ATO says they are usually separately identifiable, unlikely to be permanent, replaced within a relatively short period, and not part of the structure. None of those factors alone decides the question.

Examples in the official guidance include floating timber flooring, carpets, curtains, appliances such as a washing machine or fridge, and furniture. Land, trading stock and some intangible assets, such as goodwill, do not decline in value in this way.

You can use the effective life the Commissioner determines, or your own reasonable estimate, and you must keep records of how you worked out the decline in value. Decline in value starts when you first use the asset, or install it ready for use, even if the first use is private. The deduction is then reduced for any private use.

Assets costing $300 or less can be claimed as an immediate deduction in the year you used the asset for a taxable purpose, unless they are part of a set that together costs more than $300. The ATO's example is four dining chairs at $250 each, which cannot be treated as separate immediate deductions.

Assets valued at less than $1,000 can be grouped in a low-value pool and depreciated together, under the pooling rules.

For assets costing more than $300, you choose either the diminishing value method or the prime cost method.

The official Laura example

Laura bought a new outdoor table for her rental property on 1 July 2025 for $1,500. It has an effective life of five years.

Under diminishing value, the official formula is: asset's cost times (days held divided by 365) times (200% divided by the asset's effective life). For 2025-26 that is $1,500 times (365 divided by 365) times (200% divided by 5), which is $600. The adjustable value at 30 June 2026 is $900.

Under prime cost, the official formula is: asset's cost times (days held divided by 365) times (100% divided by the asset's effective life). For 2025-26 that is $1,500 times (365 divided by 365) times (100% divided by 5), which is $300. The adjustable value at 30 June 2026 is $1,200.

Diminishing value gives a larger deduction earlier. Prime cost spreads a more even amount. You choose a method and then need to follow the rules for that asset.

The 9 May 2017 second-hand asset limitation

There are important limits on decline-in-value claims for second-hand depreciating assets in residential rental properties.

The ATO's capital works guidance states that you can claim a separate deduction for the decline in value of depreciating assets:

  • if you bought the rental property before 7:30pm AEST on 9 May 2017, whether or not the property was brand new
  • if the depreciating asset is brand new, purchased at or after that time, either as part of a brand-new property or later for an existing property
  • if you bought the property on or after that time to provide residential accommodation, and the property is brand new or substantially renovated, no one previously claimed depreciation deductions on the asset, and either no one lived in it when you acquired it, or you acquired it within six months of it being built or renovated
  • if the property does not provide residential accommodation, or the asset is used in carrying on a business
  • if the entity claiming depreciation is a corporate tax entity, a superannuation plan other than a self-managed superannuation fund, a public unit trust, a managed investment trust, or a unit trust or partnership whose members are any of those entities

The official Kerrie and Kate examples illustrate the new-property pathway. Kerrie bought a new, never-lived-in off-the-plan unit that already contained curtains and furniture, and she can claim decline in value. Kate bought a tenanted apartment from a developer four months after completion. The developer could not claim depreciation because the assets were trading stock, and Kate acquired the property within six months of it being built, so she can also claim. If she had contracted after six months, she would not have been entitled to claim decline in value of the assets already in the property.

In short, many buyers of established residential rentals after 9 May 2017 can still claim capital works on the building, and decline in value on new items they later buy, but not on the second-hand plant that came with the property. A quantity surveyor report that lists those second-hand items is not, by itself, a right to claim them.

Frequently asked questions

Is a quantity surveyor report compulsory?

No, but the ATO accepts an estimate from a quantity surveyor or another appropriately qualified person when you do not have the original construction documents. The fee can be deductible in the year you pay it. The report still has to apply the 9 May 2017 rules correctly.

What happens when I sell?

Capital works deductions already claimed generally reduce the CGT cost base. Depreciating assets can also trigger a balancing adjustment, which can be income or a deduction, depending on the termination value and the adjustable value. Keep the schedule and give a capital works notice to the buyer where the ATO requires it.

Can I claim the purchase price of the property?

No. Land does not decline in value under these rules, and the building deduction is based on construction cost, not on what you paid for the land and building together.

General information warning

This article is general information only. It is not personal financial product advice or tax advice, and it is not a depreciation schedule or a recommendation to buy a rental property. It does not take into account your objectives, financial situation or needs. The second-hand asset rules, construction dates and balancing adjustments are technical, and an over-claim can be amended later with a penalty. Consider speaking with a registered tax agent, and confirm the current ATO pages, before you lodge.

Sources

Last reviewed: November 2026.