Depreciation is the rental deduction most investors under-claim, and the one the ATO most often sees claimed wrongly. It costs you nothing in cash each year, but the rules on what you can claim depend on when the building was constructed, when you bought it and who installed each item.
This guide covers the two types of depreciation (plant and equipment, and capital works), the second-hand asset rule from 2017, depreciation schedules and the records you need for your 2025-26 and 2026-27 returns. Every rate and date was checked against ATO rental property guidance.
It is written for individual property investors who want the full picture. If you only need the building allowance in detail, read our Division 43 capital works guide, and for a quick estimate use our rental property depreciation calculator guide.
Key takeaways
- Capital works (the building) are claimed at 2.5% a year over 40 years for residential construction started from 16 September 1987.
- Plant and equipment (removable assets) are claimed over each asset’s effective life, using diminishing value or prime cost.
- Since 7:30 pm AEST on 9 May 2017, most individual investors cannot claim second-hand plant in residential rentals.
- Assets costing $300 or less can be deducted in full; assets under $1,000 can go into a low-value pool.
- A quantity surveyor’s estimate is needed only when actual construction costs are unknown, and the fee is deductible.
- Capital works deductions reduce your cost base for capital gains tax when you sell.
Rental property depreciation at a glance
| Item | Capital works (Division 43) | Plant and equipment (Division 40) |
|---|---|---|
| What it covers | Building structure, extensions, fixed improvements | Removable or mechanical assets such as ovens, blinds, carpet, air conditioners |
| Rate | 2.5% a year (4% for 18 July 1985 to 15 September 1987 starts) | Based on effective life |
| Period | 40 years at 2.5%, 25 years at 4% | Effective life of each asset |
| Second-hand rule | Not affected | Previously used assets generally not claimable after 9 May 2017 |
| Starts | When construction is completed | When the asset is first used or installed ready for use |
Source: ATO – work out your capital works deductions, ATO – depreciating assets in rental properties, ATO – second-hand depreciating assets, checked 9 October 2026.
What is depreciation on a rental property?
Depreciation is a deduction for the cost of assets that wear out over time. The ATO treats a rental property as two separate things for this purpose: the building itself (capital works) and the plant and equipment inside it (depreciating assets).
Land is never depreciated. Your purchase price is also not a deduction; it forms part of the property’s cost base for capital gains tax.
Depreciation sits alongside your other rental property tax deductions such as interest, rates and repairs. The ATO’s how to claim rental expenses page splits expenses into those deductible now, those deductible over several years, and those not deductible at all.
How do plant and equipment differ from capital works?
A simple test: if the item is separately identifiable, likely to be replaced fairly soon and not part of the building structure, it is probably a depreciating asset. The ATO says no single factor decides this.
Plant and equipment (Division 40)
- Ovens, cooktops, dishwashers and rangehoods
- Carpets, blinds and curtains
- Air conditioning units and hot water systems
- Freestanding furniture in a furnished rental
Each asset is written off over its effective life. You can use the life the Commissioner sets or make your own reasonable estimate, as long as you keep a record of how you worked it out.
Capital works (Division 43)
- The building structure: walls, roof, floors
- Built-in cupboards and fixed kitchen and bathroom fit-out
- Structural improvements such as sealed driveways, fences and retaining walls
- Extensions, alterations and renovations
Capital works are claimed at a fixed statutory rate based on the construction cost, not your purchase price. We cover this in more depth in our capital allowances and capital works article.
Which capital works rate applies to my building?
The rate depends on when construction started. For residential buildings the ATO table sets out these periods:
| Construction started | Rate | Claim period |
|---|---|---|
| Before 18 July 1985 | No deduction for the original building | – |
| 18 July 1985 to 15 September 1987 | 4% | 25 years |
| 16 September 1987 onwards | 2.5% | 40 years |
| Eligible build-to-rent development started after 7:30 pm, 9 May 2023 | 4% (opt-in, conditions apply) | 25 years |
The build-to-rent rate applies only to active new developments that meet the build-to-rent conditions, not to an ordinary investment unit. The details are in the ATO’s rental properties guide update.
What is the second-hand asset rule?
If you acquired a residential rental property after 7:30 pm AEST on 9 May 2017, you generally cannot claim decline in value for plant and equipment that was already in it. The same applies to assets you used in your own home and then moved into a rental, or a home you later convert to a rental.
The rule does not stop you claiming:
- New assets you buy and install yourself
- Capital works on the building
- Assets if you carry on a business of letting rental properties
- Assets in a property that is not used for residential accommodation
- Assets owned by excluded entities such as companies and super funds other than SMSFs
There is also a new-property exception. If you buy a newly built or substantially renovated property within 6 months of completion, and no one was entitled to a deduction for those assets before you, you can claim them. See the ATO’s second-hand depreciating assets page for the full list.
How is decline in value worked out?
You choose one of two methods for each asset:
- Diminishing value: cost x (days held / 365) x (200% / effective life). Bigger deductions in early years.
- Prime cost: cost x (days held / 365) x (100% / effective life). An even deduction each year.
The ATO’s own example is a $1,500 outdoor table with a 5-year life bought on 1 July 2025: $600 under diminishing value or $300 under prime cost for 2025-26.
Two shortcuts help. Assets costing $300 or less can be claimed in full in the year you first use them for a taxable purpose (not if they form part of a set costing more). Assets under $1,000 can be grouped in a low-value pool and depreciated together.
Worked example: a new apartment in 2025-26
Ravi buys a brand-new apartment, completed and rented from 1 July 2025. His quantity surveyor estimates construction cost attributable to his unit at $300,000. The schedule also lists a $2,000 oven with a 10-year effective life, and he buys a $280 microwave himself.
Capital works: $300,000 x 2.5% = $7,500.
Oven (diminishing value, full year): $2,000 x 365/365 x 200%/10 = $400.
Microwave: costs $300 or less, so $280 is claimed in full.
Total depreciation for 2025-26: $7,500 + $400 + $280 = $8,180.
Ravi’s taxable income is $95,000, so his marginal rate is 30% plus the 2% Medicare levy. The deduction reduces his tax by about $8,180 x 32% = $2,617.60, without any cash spent that year.
Do I need a depreciation schedule?
The ATO does not require a schedule. It requires evidence. For capital works, that means documents showing construction costs such as receipts, or a report from an appropriately qualified person. If you do not know the actual costs, the ATO says you can get an estimate from a quantity surveyor or other independent qualified person, and the fee is deductible in the year you pay it.
In practice, a schedule is the easiest way to support claims on a new or recently renovated property. For an older property with no renovations, check the build date first: if construction started before 18 July 1985 and nothing was added later, a schedule may give you little.
Rule of thumb: Ask the agent or vendor for the build date and any renovation records before you order a schedule. If the building and any improvements are pre-July 1985 and all plant is second-hand, there may be nothing left to depreciate.
What records should I keep?
- Construction cost evidence or the quantity surveyor’s report
- Invoices for every asset you buy and install, with the date installed
- A depreciation register or spreadsheet showing method, effective life and balance for each asset
- Renovation invoices, split between capital works and plant
- Records of private use or periods the property was not available for rent
Keep capital works records for as long as you own the property and after you sell, because they affect your cost base. Our guide on when you pay capital gains tax on property explains why that matters on sale.
Common mistakes with rental property depreciation
- Claiming the previous owner’s plant: carpets and appliances in an established home bought after 9 May 2017 are usually second-hand.
- Using purchase price for capital works: the claim is based on construction cost, not what you paid.
- Claiming before completion: capital works can only be claimed once construction is completed.
- Forgetting renovations: new kitchens, bathrooms and extensions add capital works and new plant.
- Ignoring cost base adjustments: capital works claimed reduce your cost base when you sell.
If depreciation pushes your rental into a loss, our negative gearing guide explains how that loss is used. For the full list of other expenses, see rental property deductions you can claim.
FAQ about rental property depreciation
Do I need a quantity surveyor’s depreciation schedule?
No law says you must have one. The ATO says that if you cannot work out the actual construction costs, you can get an estimate from a quantity surveyor or other independent qualified person. Most investors in newer or renovated properties find a schedule is the most practical way to support both capital works and plant claims, and the fee is deductible in the year you pay it.
Can I claim the previous owner’s oven and carpets?
Usually not. If you bought an established home after 7:30 pm AEST on 9 May 2017, assets that were already installed or used by someone else are second-hand, and individual investors generally cannot claim their decline in value. Exceptions include carrying on a rental business, non-residential use and some new properties bought within 6 months of being built or substantially renovated.
Can I claim depreciation on an older property?
Often, yes, for the building itself. Residential buildings that started construction after 17 July 1985 qualify for capital works deductions at 4% (18 July 1985 to 15 September 1987) or 2.5% (from 16 September 1987). Later structural improvements and renovations can also qualify, even on an older home, if they were built within the relevant dates.
Can I go back and claim depreciation I missed?
Generally yes, by amending earlier returns. Individuals usually have 2 years from the day after the notice of assessment is sent to amend. Years outside that period cannot be amended, so missed claims for those years are lost. A schedule prepared now can still show the figures for earlier years that are within time.
Does depreciation affect capital gains tax when I sell?
Yes. Capital works deductions you have claimed must be taken into account when you work out your capital gain or loss, because they reduce the property’s cost base. Plant items are dealt with separately as depreciating assets. Keep every year’s schedule figures so your accountant can calculate the cost base correctly when you sell.
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This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO rental properties, depreciating assets, capital works and amendment time-limit pages, and the ATO time limits on amendments page, on 9 October 2026. Rates and thresholds change, so confirm the current position before acting.
