What is the difference between Division 40 and Division 43 depreciation in Australia?

In Australia, property depreciation deductions come from two separate provisions of the Income Tax Assessment Act 1997. Division 43 (capital works deductions) covers the building structure itself — brickwork, concrete, roofing, windows, walls, and fixed built-in items — and is claimed at a flat rate of 2.5% per year over 40 years (for buildings constructed after 15 September 1987). Division 40 (plant and equipment depreciation) covers removable or mechanical assets within the property — air conditioning units, hot water systems, carpets, blinds, ovens, dishwashers, and similar items — which depreciate at individual asset rates set by the ATO based on each item's effective life. A tax depreciation schedule from a quantity surveyor covers both categories and should be prepared for every investment property.

Can Australian property investors claim depreciation on second-hand investment properties purchased after 2017?

From 1 July 2017, legislation changed the rules for Division 40 (plant and equipment) depreciation in Australia for second-hand residential investment properties. If you purchased a second-hand residential investment property after 7:30 PM AEST on 9 May 2017, you can no longer claim Division 40 depreciation for assets that were already installed in the property at the time of settlement — unless those assets were acquired brand new by you after settlement. You can still claim Division 40 on new assets you install yourself (new air conditioning, new hot water system, etc.) and you can still claim Division 43 (building structure) deductions on the construction costs, provided the property was constructed after 15 September 1987. New properties and commercial properties are not affected by this change.

How much can Australian investors typically claim in property depreciation each year?

The amount varies significantly based on the property's age, construction type, value of plant and equipment, and your marginal tax rate. As a general guide based on quantity surveyor estimates: a brand-new apartment in a major capital city purchased for $650,000 might generate $10,000-$16,000 in combined Division 40 and 43 deductions in the first year. A newly built house might generate $8,000-$12,000. An older property (pre-1987 construction) may have no Division 43 building allowance claim, but any renovations after 1987 may still generate Division 43 deductions, and newly installed plant and equipment generates Division 40 claims. A quantity surveyor's depreciation schedule is the only ATO-compliant way to determine your actual entitlements.

Is a quantity surveyor's fee tax deductible in Australia?

Yes. The cost of engaging a quantity surveyor to prepare a tax depreciation schedule for your Australian investment property is tax deductible as a rental property expense in the year the fee is incurred. Quantity surveyor fees typically range from $400 to $900 for a residential investment property, depending on the property type and location. The ongoing claim from the depreciation schedule generally generates thousands of dollars in annual deductions, making the one-off cost extremely cost-effective. Quantity surveyors are recognised by the ATO under Tax Ruling TR 97/25 as professionals appropriately qualified to estimate construction costs for depreciation purposes.

Can Australian property investors use property depreciation to create a tax loss?

Yes. For investors using negative gearing, non-cash depreciation deductions can significantly increase a paper tax loss on the investment property without requiring additional out-of-pocket expenditure. For example, if your rental property returns a $5,000 cash loss (income minus cash expenses), but you also have $12,000 in depreciation deductions, your total tax loss is $17,000. At a 37% marginal rate, this generates a $6,290 tax refund, effectively reducing your real out-of-pocket cost of holding the property. The ATO classifies depreciation as a non-cash deduction — it reduces your taxable income and your tax bill without requiring any additional cash outlay in the year the deduction is claimed.

What happens to depreciation deductions when Australian investors sell their investment property?

When you sell an Australian investment property, you must factor in the depreciation you have claimed when calculating your capital gain. For Division 40 (plant and equipment), the cost base of each asset is reduced by any depreciation claimed, which can increase the capital gain on those assets. For Division 43 (building allowance), the amount claimed reduces the cost base of the property, potentially increasing your CGT exposure. However, for most investors, the annual tax savings from depreciation significantly outweigh the additional CGT on sale. The CGT impact is also deferred until the property is sold, and the 50% CGT discount applies if the property has been held for more than 12 months.

Property Depreciation for Investment Properties: Division 40 & Division 43 Guide Australia 2026

The Most Underused Tax Deduction in Australian Property Investment

Ask most Australian property investors about their tax deductions and they’ll mention interest, council rates, property management fees, and repairs. Far fewer mention property depreciation — yet for many investors, it is the largest single deduction available on their investment property, and it requires no cash outlay.

In 2025-26, the ATO estimates that hundreds of thousands of Australian investment property owners fail to claim depreciation deductions they are legally entitled to, either because they don’t know about the rules or because they haven’t had a professional depreciation schedule prepared.

This guide explains how property depreciation works in Australia, what the two separate depreciation categories cover, what you can realistically expect to claim, and what the 2017 rule change means for investors who bought second-hand properties.

What Is Property Depreciation?

When a building is constructed and fitted out, it declines in value over time due to wear and tear. The Australian Tax Office allows investment property owners to claim a tax deduction to reflect this declining value of the building and its assets.

This is a non-cash deduction: you don’t need to spend any money in the year of claim. You are simply recognising that the building and its contents are wearing out over time, and the tax system allows you to deduct this loss in value against your rental income.

For residential and commercial investment properties, depreciation deductions come under two distinct provisions of the Income Tax Assessment Act 1997:

Division 43: Capital works deductions (the building structure)
Division 40: Plant and equipment depreciation (removable assets and fittings)

Division 43: Capital Works Deductions (The Building)

Division 43 covers the structural components of a building — the parts that are fixed and form part of the building itself:

Concrete floors, foundations, and slabs
Walls (brick, timber frame, concrete)
Roof structure and roof tiles/sheeting
Windows, doors, and their frames
Built-in wardrobes (the fixed framework)
Plumbing, drainage, and electrical wiring within walls
Fencing and retaining walls
Driveways and sealed pathways
Pergolas and carports (permanently attached)

The Division 43 Rate

Division 43 is claimed at a flat rate of 2.5% per year for 40 years, based on the construction cost of the building (not the land value, and not the purchase price).

This means a property constructed for $350,000 could generate Division 43 deductions of $8,750 per year for up to 40 years (until the construction cost is fully written off).

Key Eligibility Rules for Division 43

Construction date: The building must have been constructed after 15 September 1987 for residential properties (or after 20 July 1982 for commercial properties). Buildings constructed before these dates generate no Division 43 deductions.
Ownership timing: You must own the property during the income year. Division 43 deductions are pro-rated based on the number of days the property was owned.
No second-hand restriction: Unlike Division 40, the 2017 rule change does not affect Division 43 claims. Even second-hand properties have an ongoing building allowance entitlement — as long as the building was constructed after 15 September 1987.
Renovation claims: Renovations completed after 15 September 1987 generate their own Division 43 entitlements, separate from the original construction. A $60,000 renovation on a pre-1987 property would generate 2.5% ($1,500/year) in Division 43 deductions for 40 years.

What If You Don’t Know the Original Construction Cost?

If you don’t know the construction cost of your property (which is common for second-hand purchases), a quantity surveyor can estimate it using construction cost data for the relevant period. This estimate is ATO-accepted under Tax Ruling TR 97/25.

Alternatively, the ATO allows estimates using Cost and Rental Data from AIQS (Australian Institute of Quantity Surveyors) databases, but this work must be done by a qualified quantity surveyor.

Division 40: Plant and Equipment Depreciation (Fittings and Assets)

Division 40 covers the removable or mechanical assets within a property — items that are not permanently fixed or that could be removed without significant damage to the building:

Asset	Typical Effective Life	Depreciation Rate (DV)
Split system air conditioner	10 years	20%
Hot water system (electric storage)	12 years	16.67%
Carpet	10 years	20%
Roller blinds/curtains	6 years	33.33%
Oven/cooktop (freestanding)	12 years	16.67%
Dishwasher	10 years	20%
Smoke alarm	6 years	33.33%
Security intercom	10 years	20%
Heat pump	10 years	20%
Ceiling fans	10 years	20%

The Diminishing Value (DV) method applies the depreciation rate to the asset’s remaining value each year, resulting in higher deductions in early years and lower deductions as the asset ages. The Prime Cost (PC) method claims a fixed amount each year based on the original cost.

Most depreciation schedules use the Diminishing Value method as it front-loads deductions, which is generally more beneficial (particularly for investors in high marginal tax brackets who want larger deductions early).

The 2017 Rule Change: Second-Hand Properties

The most significant change to property depreciation rules in recent years was the Treasury Laws Amendment (Housing Tax Integrity) Act 2017, which applied from 1 July 2017.

Under the new rules, Division 40 depreciation on pre-existing plant and equipment cannot be claimed by investors who purchase a second-hand residential property after 7:30 PM AEST on 9 May 2017 (the time of the 2017 Federal Budget announcement).

What this means in practice:

Scenario	Division 40 Claim?
New property purchased after 7 May 2017	Yes, full claim
Second-hand property, assets already in place at settlement	No claim on those assets
Second-hand property, new assets you install after settlement	Yes, claim on new assets only
Commercial investment property	Not affected by 2017 change
Properties purchased before 9 May 2017	Full Division 40 claim continues

Division 43 building allowance is not affected by the 2017 change. All eligible buildings (post-15 September 1987 construction) still generate Division 43 deductions regardless of when you purchased.

How Much Can You Realistically Claim?

The following table illustrates typical depreciation claims across different property types in major Australian cities. These are indicative estimates based on quantity surveyor industry data:

Property Type	Year Built	Purchase Price	Annual Div 43	Year 1 Div 40	Total Year 1
New apartment (Melbourne)	2025	$620,000	$7,500	$5,800	$13,300
New house (Brisbane)	2024	$750,000	$9,200	$4,100	$13,300
New townhouse (Sydney)	2025	$890,000	$10,500	$6,200	$16,700
Second-hand unit (2005 build)	2005	$480,000	$4,800	$0*	$4,800
Second-hand house (1995 build)	1995	$850,000	$3,100	$0*	$3,100
Commercial office unit	2018	$500,000	$5,000	$3,500	$8,500

*Division 40 cannot be claimed on pre-existing assets in second-hand residential properties purchased after 9 May 2017.

The Tax Impact: Real Dollar Savings

For an investor in the 37% marginal tax bracket (income $135,001 to $190,000):

Annual Depreciation Claim	Tax Saving at 37%	Tax Saving at 32.5%
$8,000	$2,960	$2,600
$12,000	$4,440	$3,900
$15,000	$5,550	$4,875

These are non-cash tax savings — the money stays in your pocket without any additional expenditure.

Depreciation and Negative Gearing: The Combined Effect

Property depreciation is particularly powerful when combined with negative gearing. Consider an investor who owns a new apartment in Brisbane:

Annual income and expenses:

Rental income: $32,000
Interest (mortgage at 6.5%): $31,200
Property management (8%): $2,560
Council rates, insurance, maintenance: $3,200
Cash loss: -$4,960

Add depreciation:

Division 43 (building): $8,500
Division 40 (plant and equipment): $4,800
Total depreciation: $13,300

Total tax loss: $18,260

At a 37% marginal rate, this generates a tax saving of $6,756 per year — which converts a $4,960 cash loss into an effective after-tax gain of approximately $1,796 per year, before any capital growth.

The ATO allows these losses to be offset against other income (salary, business income), reducing your annual tax bill. PAYG variation allows you to reduce the tax withheld from your salary throughout the year, rather than waiting for a refund at tax time.

The Importance of a Professional Depreciation Schedule

The ATO requires that Division 43 deductions be based on a reasonable estimate of original construction cost. A professional quantity surveyor can:

Estimate construction costs using historical pricing databases
Calculate Division 43 deductions for the original build and any subsequent renovations
Identify all eligible Division 40 assets and their individual effective lives
Produce an ATO-compliant schedule that your accountant can use year after year

Why an estimate matters: Without a quantity surveyor’s report, the ATO may disallow depreciation claims or require evidence of construction costs that you simply don’t have for a second-hand property. Tax Ruling TR 97/25 specifically recognises quantity surveyors as qualified to estimate these costs.

Cost of a depreciation schedule: $400 to $900 for a typical residential investment property, depending on the property and location. This fee is tax-deductible in the year incurred.

Choosing a Quantity Surveyor

Look for a quantity surveyor who:

Is a member of the Australian Institute of Quantity Surveyors (AIQS)
Specialises in tax depreciation schedules
Offers a guarantee that their report will generate deductions worth more than their fee (this is standard industry practice)
Inspects the property in person (desktop estimates are less accurate and may not capture all assets)

The major providers in Australia include BMT Tax Depreciation, Washington Brown, and Depreciator, but smaller regional firms often provide equivalent quality at lower cost.

Depreciation and CGT: What Happens When You Sell

A common concern among property investors is the impact of depreciation on their eventual capital gain. Here’s how it works:

Division 43 and cost base: When you sell, the Division 43 deductions you have claimed reduce your cost base for CGT purposes. This means your capital gain on sale will be higher by the amount of building allowance claimed over your ownership period.

Division 40 and cost base: Plant and equipment assets each have their own depreciated cost base. When you sell, you may crystallise small gains or losses on individual assets depending on their written-down value.

However, the critical point is: the tax savings from annual depreciation deductions are received now, at your current marginal rate, while the additional CGT on sale is:

Deferred until the sale date
Subject to the 50% CGT discount if held over 12 months
Potentially taxed at a lower effective rate if you’re in a lower bracket at retirement

For most investors, the time value of money (receiving tax savings now vs. paying slightly more CGT later) makes depreciation claiming highly beneficial regardless of the eventual sale.

Common Mistakes Property Investors Make with Depreciation

1. Not Getting a Depreciation Schedule at All

Many investors — particularly those who bought before 2017 — have never had a schedule prepared. A retrospective depreciation schedule covers all years of ownership and can generate an amended tax return to capture missed deductions going back two years.

2. Assuming a Pre-1987 Property Has No Claim

While pre-1987 buildings have no Division 43 building allowance, renovations after 15 September 1987 still generate Division 43 deductions. And all properties (regardless of age) can have Division 40 claims on newly installed plant and equipment.

3. Using the Wrong Method

Choosing Prime Cost over Diminishing Value for assets in the early years of ownership can result in lower deductions in the period when they matter most (early in the mortgage when cash flow is tightest).

4. Forgetting Commercial Properties

Commercial property investors who don’t claim depreciation are leaving substantial deductions unclaimed. The 2017 rule change did not affect commercial properties — both Division 40 and Division 43 claims remain fully available.

5. Not Reviewing After Renovations

If you’ve renovated your investment property, the renovation creates new Division 43 deductions. Many investors fail to update their depreciation schedule after significant work, missing out on years of additional claims.

Working with a Property Tax Specialist

Property depreciation sits at the intersection of property, tax, and accounting. Getting it right requires both a quantity surveyor (to determine what can be claimed) and an accountant who understands rental property taxation (to apply the claims correctly, manage cost base adjustments, and integrate with your overall tax position).

Given the complexity of the 2017 rules, CGT implications, and the interaction with negative gearing strategies, working with a property-experienced accountant or tax adviser is strongly recommended.

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