The building itself is usually the single largest deduction an investment property produces, and the one most often left unclaimed. Division 43 of the tax law lets you write off the construction cost of an income-producing building and its structural improvements at 2.5% or 4% a year – without spending another dollar – for up to 40 years after it was built.
This guide explains what qualifies, the rates and construction dates that apply, when the deduction starts, what to do when you do not know what the building cost, how the deduction interacts with capital gains tax when you sell, and how to claim it in your 2025-26 return. It is checked against the ATO’s capital works deductions page, the capital works section of the ATO’s Rental properties guide 2026 and section 43-25 of the Income Tax Assessment Act 1997.
It is written for residential and commercial property investors and business owners who own their premises. For the removable assets inside the building, which are depreciated under different rules, read it with our guide to capital allowances versus capital works.
Key takeaways
- Capital works are the building and its structure: the building itself, extensions, alterations, and structural improvements such as sealed driveways, fences, retaining walls, carports and pergolas. Land, landscaping and plant and equipment are excluded.
- Rates: 2.5% a year over 40 years for most buildings; 4% over 25 years for 1984-87 builds, hotels and short-term traveller accommodation, industrial buildings and post-May-2023 build-to-rent.
- Key dates: buildings begun on or after 22 August 1979; structural improvements begun after 26 February 1992.
- Start date: only once construction is complete and the property is used or available to produce income; pro-rata in the first year.
- Unknown cost? Use an estimate from a quantity surveyor or other qualified person – not a valuer, agent or accountant.
- CGT: deductions claimed (or claimable) reduce your cost base on sale. The unclaimed balance passes to the new owner.
Division 43 rates at a glance
| Capital works | Construction started | Rate | Period |
|---|---|---|---|
| Residential rental and most other buildings | Before 22 August 1979 | Nil | – |
| Residential rental and most other buildings | 22 August 1979 to 21 August 1984 | 2.5% | 40 years |
| Residential rental and most other buildings | 22 August 1984 to 15 September 1987 | 4% | 25 years |
| Residential rental and most other buildings | After 15 September 1987 | 2.5% | 40 years |
| Hotels, motels, guest houses (10+ rooms) and short-term traveller apartments; buildings used for industrial activities | From 27 February 1992 | 4% | 25 years |
| Eligible build-to-rent developments | After 9 May 2023 | 4% | 25 years |
| Structural improvements (sealed driveways, fences, retaining walls, car parks, bridges, pipelines) | After 26 February 1992 | 2.5% | 40 years |
Source: ATO Rental properties guide 2026, Table 2 (rate of deduction based on date construction started); ITAA 1997 s 43-25, s 43-20 and Tables 43-140 and 43-145. Checked 7 October 2026.
What is a capital works deduction?
Division 43 of the Income Tax Assessment Act 1997 allows a deduction for “construction expenditure” on capital works used to produce assessable income. The ATO’s short description: “Capital works used to produce income, including buildings and structural improvements, are written off over a longer period than other depreciating assets.” The logic is that a building wears out, slowly, and the owner should be able to deduct that cost over its life rather than only recovering it through the cost base when the property is sold.
The ATO lists the capital works that qualify as:
- buildings, or extensions, alterations or improvements to a building – the Rental properties guide gives “adding a room, garage, patio or pergola” and “removing or adding an internal wall” as examples;
- alterations and improvements to a leased building, including shop fit-outs and leasehold improvements, which must be claimed at the statutory 2.5% or 4% rate rather than over the lease term;
- structural improvements such as sealed driveways, fences, retaining walls, gazebos and carports – the Act adds sealed roads and car parks, bridges and pipelines;
- earthworks for environmental protection, such as embankments.
“Construction expenditure” is the capital cost of constructing the works. According to the ATO’s return instructions it includes preliminary costs such as architect’s and engineering fees, foundation excavation and building permits. It excludes the cost of the land, demolishing existing structures, clearing, levelling, filling or draining the site before excavation, landscaping, and anything that is plant (which is depreciated under Division 40). The Rental properties guide puts the land point plainly: “The land itself can’t be written off and its cost isn’t deductible.”
Capital works versus plant and equipment
Every investment property splits into two depreciation categories, and getting items into the wrong one is the most common error on depreciation schedules.
| Capital works (Division 43) | Plant and equipment (Division 40) | |
|---|---|---|
| What it covers | The structure: walls, roof, floors, built-in cupboards, kitchen cabinetry, tiles, driveways, fences, retaining walls | Removable or mechanical assets: carpet, blinds, ovens, dishwashers, air conditioners, hot water systems, smoke alarms |
| Rate | 2.5% or 4% of construction cost, fixed by statute | Based on each asset’s effective life, prime cost or diminishing value |
| Period | 40 or 25 years from completion | Varies by asset – often 5 to 15 years |
| Second-hand residential property bought after 9 May 2017 | Still claimable by the new owner | Generally not claimable on previously used assets |
| Effect on CGT cost base | Reduces the cost base | Assets are separate from the property for CGT; balancing adjustments apply |
The second-hand restriction on plant and equipment is why Division 43 has become the dominant deduction for investors buying established properties: the building write-off survives a change of ownership, the carpets and ovens generally do not. Our guide to rental property deductions you can claim covers both categories alongside interest, repairs and the other running costs.
Who can claim, and from when?
You can claim if you own (or lease, for leasehold improvements) capital works that are used, or held ready for use, to produce assessable income in the year – a rented residential property, commercial premises you lease out or operate your business from. Your own home does not qualify unless part of it is genuinely used to produce income, such as a room let to a tenant or a dedicated business area.
Timing has three rules, all from the ATO guide and the Act:
- Nothing before completion. “No deduction is available until the construction is complete.” Section 43-30 adds that you cannot deduct an amount for any period before completion “even though you used them, or part of them, before completion”.
- Pro-rata in the first year. “If the construction was completed part of the way through the income year, you can claim a pro-rata deduction for that part.”
- Only while income-producing. “You can only claim deductions for the period during the year that the property is used or held to produce rental income.” A property you lived in for three months and rented for nine gives a nine-month claim.
The 25 or 40-year clock runs from the completion date, not from when you bought the property. If you buy a 1998 house in 2026, you inherit the remaining 12 years of the original owner’s 40-year period on the original construction – and a fresh 40 years on any renovation completed later. “Where ownership of a building changes, the right to claim any undeducted construction expenditure for capital works passes to the new owner.”
How much can you claim? Rates and dates
Section 43-25 sets the rate. For capital works begun after 26 February 1992 there is “a basic entitlement to a rate of 2.5%”, rising to 4% for works used “in the 4% manner” – hotels, motels and guest houses with at least 10 bedrooms of short-term traveller accommodation, apartment buildings of short-term traveller apartments, buildings used for industrial activities, and from 9 May 2023 eligible build-to-rent developments. For works begun before 27 February 1992 the rate is 4% if begun after 21 August 1984 and before 16 September 1987, and 2.5% otherwise. Residential and ordinary commercial buildings therefore sit at 2.5% unless they fall in the 1984-87 window.
Worked example: a 2.5% building
Harpreet buys a townhouse in Truganina in September 2025 for $650,000 and rents it out immediately. A quantity surveyor estimates the original construction cost, completed in March 2016, at $320,000, plus a $28,000 pergola and sealed driveway added in 2021. Her capital works deduction is 2.5% x $320,000 = $8,000 a year on the building (running to March 2056) plus 2.5% x $28,000 = $700 on the structural improvements (running to 2061). In 2025-26, with the property rented from 15 September, she claims a pro-rata amount for 289 of 365 days: $8,700 x 289/365 = $6,889. At a 37% marginal rate that is about $2,549 of tax saved, with no cash outlay, before any plant and equipment or running costs.
Worked example: when the clock has run out
Daniel owns a Reservoir unit whose construction began in 1985 and finished in July 1986, so it attracted the 4% rate over 25 years. That period ended in 2011. His depreciation schedule now shows nothing for the original building, but the bathroom and kitchen renovation completed in 2019 ($45,000) continues at 2.5%, $1,125 a year, until 2059.
What if you do not know the construction cost?
Most investors buy rather than build and have no idea what the building cost. The ATO’s answer: “If it isn’t possible to determine the actual construction costs, you can get an estimate from a quantity surveyor or other independent qualified person.” The Rental properties guide names who qualifies – a clerk of works, a supervising architect who approves stage payments, a builder experienced in estimating similar projects, or a quantity surveyor – and who does not: “Unless they’re otherwise qualified, valuers, real estate agents, accountants and solicitors generally have neither the relevant qualifications nor the experience to make such an estimate.”
A quantity surveyor’s tax depreciation schedule covers both Division 43 and Division 40, apportions costs between the structure and plant, applies the right rate and start date for each component, and gives you a year-by-year schedule for the life of the claim. The fee is itself deductible as a cost of managing your tax affairs. If you have the actual construction contract and invoices – because you built, or the developer supplied them – you must use the actual figures rather than an estimate. See our guide to claiming depreciation on an investment property for how the schedule feeds into the return.
Rule of thumb
If your rental property was built or renovated after 1987 and you have never had a depreciation schedule, you are almost certainly leaving money on the table – and you can amend the last two years’ returns (four for sole traders from 2024-25) to recover it.
Capital works and capital gains tax
The deduction is not free money forever. The Rental properties guide: “You must exclude from the cost base of a CGT asset the amount of capital works deductions you claimed or can claim for the asset if you either: acquire the asset after 7:30 pm AEST on 13 May 1997; acquire the asset before that time and the expenditure that gave rise to the capital works deductions was incurred after 30 June 1999.” Two points follow. First, “or can claim” means the cost base is reduced whether or not you actually claimed – so not claiming gains you nothing. Second, because the capital gain on a property held more than 12 months is generally discounted by 50%, deducting $8,000 a year at your marginal rate now and adding back a discounted amount to the gain later is still a net benefit for most investors. Our guide to capital gains tax changes covers the current discount rules.
How to claim in your 2025-26 return
- Confirm the construction and completion dates and the use of the property during the year.
- Obtain the actual construction cost or a depreciation schedule from a qualified estimator.
- Apply the rate and pro-rata for the days the property was income-producing.
- Enter the amount at the capital works deductions label in the rental property schedule (myTax: Rent, then Capital works deductions) or, for business premises, as a deduction in the business schedule.
- Keep the schedule, contracts and invoices for five years after your last claim, and keep a running total of deductions claimed for the eventual CGT calculation.
Common mistakes
- Claiming appliances and carpet under capital works. They are plant; use Division 40 and the second-hand rules.
- Using a valuer’s or agent’s figure for construction cost. The ATO does not accept it.
- Starting the clock at purchase rather than completion, or claiming before completion.
- Claiming a full year for a property that was rented part of the year.
- Forgetting structural improvements – fences, driveways, retaining walls, pergolas, carports.
- Claiming demolition, site preparation or landscaping as construction expenditure.
- Not updating the schedule after a renovation, so new capital works go unclaimed.
- Ignoring the cost base reduction at sale – the ATO applies it whether or not you claimed.
The Treasury’s brief history of Australia’s tax system explains how building allowances evolved from the 1979 and 1985 reforms into the current regime – useful context for why the dates in the table above look the way they do.
FAQ about capital works deductions
What is the capital works deduction rate?
For most buildings it is 2.5% of the construction cost a year for 40 years from completion. The rate is 4% over 25 years for buildings whose construction started between 22 August 1984 and 15 September 1987, for hotels, motels and short-term traveller apartments and for buildings used for industrial activities begun from 27 February 1992, and for eligible build-to-rent developments where construction started after 9 May 2023. Structural improvements such as fences, sealed driveways and retaining walls qualify at 2.5% if begun after 26 February 1992.
When does the deduction start?
When construction is complete and the property is used, or held, to produce income. The ATO is explicit that “no deduction is available until the construction is complete”, and the law (section 43-30) bars any deduction for a period before completion even if part of the building was used. If completion falls part-way through a year, you claim a pro-rata amount for that part, and you can only claim for the days the property was rented or available for rent.
Can I claim capital works on an old building?
Only if construction started on or after 22 August 1979 and the 25 or 40-year period from completion has not run out. A building completed in 1986 at 4% finished its 25 years in 2011; one completed in 1988 at 2.5% runs until 2028. Structural improvements and renovations completed later have their own clocks, so an old house with a 2015 extension still produces a claim on the extension.
Do I need a quantity surveyor?
If you know the actual construction cost – you built it, or the vendor provided the figures – you use that. If not, the ATO accepts an estimate from a suitably qualified person: it names a clerk of works, a supervising architect, an experienced builder or a quantity surveyor, and says valuers, real estate agents, accountants and solicitors “generally have neither the relevant qualifications nor the experience to make such an estimate”. In practice a quantity surveyor’s depreciation schedule is the standard approach for a purchased property.
Does claiming capital works affect capital gains tax when I sell?
Yes. For a property acquired after 7.30 pm on 13 May 1997 (or earlier where the expenditure was incurred after 30 June 1999), you must reduce the CGT cost base by the capital works deductions you claimed or could have claimed. The deduction is a timing benefit at your marginal rate now, partly clawed back through a larger capital gain later – but the gain is usually discounted by 50% if you held the property for more than 12 months, so it is still worthwhile. The unclaimed balance passes to the buyer.
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If you own a rental property and have never had a depreciation schedule, or you are not sure which rate and dates apply to a renovation, we can review the position and amend prior returns where a claim was missed. Nanak Accountants works with property investors across Australia. Call 1300 626 258 or book a free 15-minute consultation.
This article is general information only and is not personal tax advice. Rates, dates, the completion and pro-rata rules, estimator requirements and the CGT cost base rule were checked against the ATO Rental properties guide 2026, the ATO capital works page and sections 43-20, 43-25, 43-30 and 43-70 of the ITAA 1997 on 7 October 2026.
