Depreciation is one of the few rental property deductions you can claim without spending cash in the year. It is also one of the easiest to get wrong, because two different sets of rules apply and the purchase price of your property is not the starting figure.
This guide shows you how to estimate depreciation yourself for the 2025-26 and 2026-27 income years: Division 43 capital works, Division 40 plant and equipment, the second-hand asset restriction, diminishing value versus prime cost, and a worked calculation. Each rule was checked against the ATO rental properties guide 2026 and related ATO pages.
It is for residential property investors who want to sense-check a quantity surveyor schedule or estimate deductions before buying. For the full list of other expenses you can claim, see our guide to rental property deductions.
Key takeaways
- Capital works on residential construction started on or after 16 September 1987 is deducted at 2.5% a year over 40 years.
- Construction started between 18 July 1985 and 15 September 1987 is deducted at 4% a year over 25 years.
- You cannot use the purchase price: capital works needs construction cost evidence.
- Second-hand plant and equipment in residential rentals bought after 7:30pm on 9 May 2017 is generally not deductible.
- Diminishing value uses 200% / effective life; prime cost uses 100% / effective life.
Rental property depreciation at a glance
| Item | Division 43 capital works | Division 40 plant and equipment |
|---|---|---|
| Covers | Building structure: walls, roof, built-in kitchen and bathroom work | Removable assets: carpets, blinds, ovens, dishwashers, hot water systems |
| Rate | 2.5% (or 4% for 18 July 1985 to 15 September 1987 starts) | Based on each asset’s effective life |
| Starting figure | Construction cost, not purchase price | Cost of each asset |
| Second-hand property | Still claimable if construction dates qualify | Generally not claimable for assets bought with property after 9 May 2017 |
| Evidence | Receipts or a report by a qualified person | Invoices and effective life |
Source: ATO capital works deductions, ATO depreciating assets in rental properties, ATO second-hand depreciating assets, checked 7 October 2026.
What is the difference between Division 40 and Division 43?
Division 43 covers capital works: the building itself and structural improvements such as extensions, renovations and built-in items. Division 40 covers depreciating assets, which are items that can be removed or that wear out faster than the building.
The split matters because the rates are different and only Division 40 is hit by the second-hand rule. Our Division 43 capital works guide covers the structural side in more depth. Our older article on the capital works deduction and the ATO page on depreciating assets in rental properties are also useful background.
How do you estimate capital works deductions?
The ATO formula is: construction cost x rate x (days used to earn income / 365). The rate depends on when construction started.
- Before 18 July 1985: no capital works deduction for the original residential construction.
- 18 July 1985 to 15 September 1987: 4% a year for 25 years.
- 16 September 1987 onwards: 2.5% a year for 40 years.
Later renovations have their own start date and cost. You can only start claiming once the work is completed. If you do not know the construction cost, the ATO capital works page says to get it from the previous owner or an appropriately qualified person, such as a quantity surveyor.
How do you estimate plant and equipment depreciation?
Each asset is written off over its effective life. The ATO sets out two methods on its prime cost and diminishing value page:
- Diminishing value: base value x (days held / 365) x (200% / effective life). Larger deductions early.
- Prime cost: cost x (days held / 365) x (100% / effective life). The same deduction each year.
Effective lives come from the ATO. These examples are from the rental properties guide 2026 item list for assets acquired from 1 July 2019:
| Asset | Effective life | Diminishing value rate | Prime cost rate |
|---|---|---|---|
| Carpets | 8 years | 25% | 12.5% |
| Window blinds (internal) | 10 years | 20% | 10% |
| Curtains | 6 years | 33.33% | 16.67% |
| Hot water system (electric or gas) | 12 years | 16.67% | 8.33% |
| Oven | 12 years | 16.67% | 8.33% |
| Dishwasher | 8 years | 25% | 12.5% |
Assets costing $300 or less can be claimed outright in the year you start using them to earn rent. Assets costing less than $1,000 can go into a low-value pool, which is depreciated at 18.75% in the first year and 37.5% after that, according to the ATO low-value pool instructions.
Can you claim depreciation on a second-hand property?
You can still claim capital works if the construction dates qualify. Plant and equipment is different. Since 1 July 2017, deductions are generally not available for second-hand depreciating assets in residential rentals, meaning assets already installed or used by someone else, or used in your own home, if you acquired them after 7:30pm on 9 May 2017.
The ATO second-hand asset page lists exceptions, including carrying on a business of letting rental properties and excluded entities such as corporate tax entities and super funds other than SMSFs. New assets you buy and install yourself remain deductible.
Which calculator should you use?
The free ATO depreciation and capital allowances tool calculates decline in value for individual assets under both methods and shows the result if you sell an asset. Commercial calculators estimate capital works from building type and age, but the ATO still requires construction cost evidence for your actual claim. The rental properties guide 2025 and the 2026 edition explain how the figures go into your return.
Worked example: brand new apartment held for the full 2025-26 year
Sam buys a brand new apartment and rents it out from 1 July 2025. A quantity surveyor reports a construction cost of $320,000. Sam also has carpets ($6,000), blinds ($3,000), an oven ($2,000) and a dishwasher ($1,200), all new.
Capital works: $320,000 x 2.5% = $8,000.
Diminishing value: carpets $6,000 x 200% / 8 = $1,500; blinds $3,000 x 200% / 10 = $600; oven $2,000 x 200% / 12 = $333; dishwasher $1,200 x 200% / 8 = $300. Total $2,733.
Prime cost for comparison: $750 + $300 + $167 + $150 = $1,367.
Year one total using diminishing value: $8,000 + $2,733 = $10,733. At a 30% marginal rate plus 2% Medicare levy, that is about $10,733 x 32% = $3,435 less tax.
Rule of thumb: If the property was built after 15 September 1987, start with construction cost x 2.5%, then add plant and equipment only for assets you bought new.
Common mistakes when estimating rental depreciation
- Using the purchase price: capital works is based on construction cost, never the price of the building and land.
- Claiming the previous owner’s assets: second-hand plant in a residential rental bought after 9 May 2017 is generally not deductible.
- Wrong construction date: the start date decides whether you get 4%, 2.5% or nothing.
- Ignoring days rented: both formulas reduce for part-year or private use.
- Forgetting the CGT effect: capital works deductions claimed must be taken into account when you work out your capital gain. See our CGT on property guide.
For more on claiming, read our article on how to claim depreciation on an investment property.
FAQ about rental property depreciation
Can I use an online depreciation calculator for my tax return?
A calculator is useful for estimating, but the figures you claim must be backed by evidence. For capital works, the ATO requires receipts showing construction costs or a report by an appropriately qualified person such as a quantity surveyor. For plant and equipment, you need the cost of each asset and its effective life.
Can I claim depreciation on the oven and carpet in an established rental I bought?
Usually not, if you bought the property after 7:30pm on 9 May 2017 and the assets were already installed or used by someone else. These are second-hand depreciating assets. Exceptions include carrying on a rental property business and excluded entities such as companies. You can still claim capital works and new assets you buy yourself.
What is the capital works rate for a house built in the 1990s?
Residential construction that started on or after 16 September 1987 is deductible at 2.5% a year over 40 years. Construction that started between 18 July 1985 and 15 September 1987 is deductible at 4% a year over 25 years. The deduction is based on construction cost, not the price you paid for the property.
Should I choose diminishing value or prime cost?
Diminishing value gives larger deductions in the early years because it uses 200% divided by the effective life applied to a falling base value. Prime cost spreads the deduction evenly using 100% divided by effective life. Over the full life the total is similar, so the choice is mostly about timing your deductions.
Does claiming capital works affect capital gains tax when I sell?
Yes. The ATO says capital works deductions you have claimed must be taken into account when you work out your capital gain or loss. In practice this usually means a larger capital gain on sale, so keep a running record of every capital works deduction claimed over the years you own the property.
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A depreciation estimate is only as good as the dates and costs behind it. Nanak Accountants can check your schedule, apply the second-hand rules and include the right figures in your rental schedule. Call 1300 626 258, book a free 15-minute consultation or visit Nanak Accountants.
This article is general information only and is not personal tax or legal advice. Figures and rules were checked against the ATO rental properties guide 2026, capital works, depreciating assets, second-hand assets and low-value pool pages on 7 October 2026. Rates and thresholds change, so confirm the current position before acting.
