Capital Works Deduction

What is a capital works deduction?

A capital works deduction spreads eligible construction expenditure over time under Division 43 of Australia's income tax rules. It can relate to a rental building, an extension or a qualifying structural improvement. It does not mean deducting a percentage of the price paid for the property.

Construction cost and purchase price are different

A sale price includes land and reflects the market at the time of sale. A capital works calculation uses qualifying construction expenditure. Buying an existing building does not restart its deduction period.

The ATO's rental properties guide explains that deductions generally run over 25 or 40 years and cannot start before construction is complete. The applicable rate depends on construction dates, type and use. A 2.5% assumption should not be applied to every building.

Worked example: a full-year assumption

Suppose records establish $240,000 of eligible construction expenditure, a 2.5% annual rate and a remaining deduction period. Assume a single owner and qualifying rental use throughout the year.

Item	Illustrative amount
Eligible construction expenditure	$240,000
Assumed annual rate	2.5%
Annual deduction before any required adjustments	$6,000

The calculation is $240,000 × 0.025 = $6,000. It is a deduction from taxable income, not a $6,000 payment or guaranteed tax refund. Part-year rental use, private use and ownership shares can change the amount relevant to a return. The example is not an eligibility assessment.

What records help?

Keep construction dates, cost records, earlier schedules and rental-use dates together. If actual construction expenditure cannot be determined, the ATO explains when an independent qualified estimate may be used. A quantity surveyor is one option. A report does not create an entitlement that the tax rules exclude.

How to use the figure in an estimate

Read the property depreciation guide before entering a professionally checked annual amount into the negative gearing calculator. Keep it separate from cash maintenance costs in the investment property yield calculator: an annual capital works deduction is not that year's repair bill.

For the broader distinction between building costs and individual assets, see depreciation. Keep records for a future sale too, because capital works deductions can affect the CGT cost base.

*General information only, not tax, financial or investment advice. Check the ATO guidance and speak with a registered tax agent about a particular property. *

Last updated: 12 September 2026.