Property Depreciation for Tax: Division 40 & Division 43 Explained

Overview

Depreciation is one of the most valuable but often overlooked tax deductions available to Australian property investors. It allows you to claim the decline in value of the building structure and its fixtures and fittings as a tax deduction — even though you have not spent any money in that financial year. Understanding how depreciation works can significantly improve the after-tax return on your investment property.

What Is Property Depreciation?

Depreciation is the reduction in value of an asset over time due to wear and tear, age, and obsolescence. The ATO allows investment property owners to claim this decline in value as a tax deduction against their rental income.

There are two categories of property depreciation:

• Division 43 — Capital Works Deduction: The building structure itself
• Division 40 — Plant and Equipment: Removable fixtures, fittings, and appliances within the property

Division 43: Capital Works Deduction (Building Allowance)

Division 43 covers the construction cost of the building structure, including walls, floors, roofs, doors, windows, and fixed structural improvements such as driveways and fences.

Key Rules:

• The deduction rate is 2.5% per year for residential properties built after 15 September 1987 (based on the original construction cost)
• For properties built between 18 July 1985 and 15 September 1987, the rate is 4% per year
• The deduction is available for 40 years from the date construction was completed
• The deduction is based on the original construction cost, not the price you paid for the property

For example, if the original construction cost of a residential property was $300,000, the annual Division 43 deduction would be $7,500 (2.5% of $300,000). Over 40 years, you can claim the full $300,000.

Important: Pre-1985 Buildings

Properties where construction commenced before 18 July 1985 are not eligible for Division 43 deductions. However, any renovations or capital improvements made after that date can be claimed separately.

Division 40: Plant and Equipment

Division 40 covers removable or mechanical items within the property that are not part of the building structure. These items have individual effective lives set by the ATO, and the deduction is calculated based on the decline in value over that life.

Common Division 40 Items:

• Carpet and floor coverings
• Blinds and curtains
• Hot water systems
• Air conditioning units
• Dishwashers, ovens, and cooktops
• Light fittings and ceiling fans
• Smoke alarms and security systems
• Garage door motors
• Garden sheds

Methods of Depreciation:

You can choose between two methods for Division 40 items:

• Diminishing value method: A higher deduction in the early years, decreasing over time
• Prime cost method: A consistent, even deduction each year over the item's effective life

Once you choose a method for an item, you must continue using that method for that item.

The 2017 Changes (Budget Measure)

From 1 July 2017, the government restricted Division 40 deductions for second-hand (previously used) plant and equipment items in residential properties. Under these rules:

• If you purchase a residential property with existing fixtures and fittings (second-hand items), you cannot claim Division 40 deductions for those items
• You can claim Division 40 deductions for new items you purchase and install yourself
• Division 43 (building allowance) deductions are not affected by this change — you can still claim Division 43 on the building regardless of when you purchased it

This means depreciation on plant and equipment is most valuable for new properties or when you install new items in an existing property.

Depreciation Schedules

A depreciation schedule is a report prepared by a qualified quantity surveyor that estimates the depreciation deductions available for your property. The quantity surveyor inspects the property (or reviews plans for new builds) and provides a detailed schedule of Division 40 and Division 43 deductions for each financial year.

Is It Worth Getting a Schedule?

For most investment properties, yes. A depreciation schedule typically costs $400 to $800 and can identify tens of thousands of dollars in deductions over the life of the property. The schedule is a one-off cost and is itself tax-deductible.

Properties most likely to benefit:

• New properties: Full Division 40 and Division 43 deductions available
• Properties built after 1987: Division 43 deductions available
• Recently renovated properties: New fixtures and fittings can be claimed under Division 40

Properties less likely to benefit:

• Pre-1985 properties with no renovations: No Division 43 and limited Division 40 (due to the 2017 changes)

How Depreciation Affects Negative Gearing

Depreciation is a non-cash deduction — you claim it without spending any money in that year. This makes it particularly powerful for negatively geared properties, as it increases your tax loss (and therefore your tax refund) without increasing your cash outflow.

Use our Negative Gearing Calculator to see how depreciation deductions affect your net position.

Record Keeping

Keep your depreciation schedule, purchase records, and receipts for any new items you install. The ATO may request evidence of claims, particularly for Division 40 items where the 2017 rules apply.

Model your tax position: Negative Gearing Calculator | Calculate investment yield: Investment Property Yield Calculator.

Sources: ATO — Rental Properties Guide, ATO — Division 40 and Division 43, ASIC Moneysmart, BMT Tax Depreciation.