Depreciation on investment property in Australia: Division 43 and Division 40 explained

Depreciation is one of the most overlooked deductions in property investment. It reduces your taxable income without costing you a cent out of pocket. Here is how it works, what the rules are, and how to make sure you are claiming everything you are entitled to.

What is property depreciation?

The ATO allows you to claim a deduction for the decline in value of a building and its fixtures over time. Buildings wear out. Carpets wear out. Hot water systems wear out. The tax system recognises this by letting you write off a portion of those costs each year, even though you have not physically spent any money in that period.

There are two categories of depreciation for investment property. Division 43 covers the building itself: the walls, the roof, the structural elements. Division 40 covers the removable items inside it: carpets, blinds, appliances, air conditioning units. Both reduce your taxable income, but they follow different rules and different rates.

Division 43: capital works deductions

Division 43 applies to the building structure. The deduction rate is 2.5% of the original construction cost per year, spread over 40 years. This is a straight-line deduction: the same dollar amount every year until the 40 years are up.

There is one important eligibility rule. The building must have been constructed after 15 September 1987. Properties built before that date do not qualify for Division 43 at all. If the property was built in, say, 1995, you can still claim the remaining years of the 40-year schedule from the original construction date.

The original construction cost is the figure that matters, not the price you paid for the property. If you bought a unit for $650,000 but it cost $280,000 to build in 2005, the 2.5% applies to $280,000. If original records are not available, a quantity surveyor can estimate the construction cost using current building rates adjusted for age.

Division 40: plant and equipment

Division 40 covers the removable items inside the property. These are things you could theoretically pick up and take with you: carpets, blinds, hot water systems, air conditioning units, dishwashers, ovens, rangehoods, and similar fixtures.

Each item has an effective life set by the ATO. Most investors use the diminishing value method, which front-loads the deduction. You claim more in the early years and less as the item ages. This is useful because the tax benefit is larger when the item is newer and the property is more likely to be negatively geared.

Year 1 figures use the diminishing value method. Actual deductions depend on the date the item was first used.

The second-hand property rule (post-May 2017)

On 9 May 2017, the government changed the rules for Division 40 in existing residential properties. If you buy a property that already has items like carpets, blinds, and appliances installed by a previous owner, you can no longer claim Division 40 deductions on those second-hand items. The items are still there, they still wear out, but the ATO no longer allows you to claim the decline in value.

This rule only affects items that were in the property at the time of purchase. If you buy an established property and then replace the carpet, install a new dishwasher, or fit a new air conditioning unit, those new items are fully claimable under Division 40. The rule targets inherited fixtures, not things you put in yourself.

Division 43 is not affected by this change at all. You can still claim the building structure deduction on any property built after September 1987, regardless of whether it is new or established. This means the second-hand rule reduced the total depreciation available on older properties, but it did not eliminate it.

Depreciation by property type

The total depreciation you can claim varies significantly depending on whether the property is new or established, and whether it is a house or an apartment. Apartments tend to have higher Division 43 deductions relative to purchase price because a larger portion of the cost is in the building rather than the land.

Ranges are indicative and depend on construction cost, property age, and fit-out quality. Get a quantity surveyor report for precise figures.

How to get a depreciation schedule

To claim depreciation properly, you need a depreciation schedule prepared by a qualified quantity surveyor (sometimes called a tax depreciation specialist). This is not something your accountant does. It requires a physical or desktop inspection of the property and a detailed assessment of the building and its contents.

A depreciation schedule typically costs between $600 and $800. The fee itself is tax deductible in the year you pay it. The schedule covers the full 40-year life of the property and itemises every claimable component under both Division 43 and Division 40. Your accountant then uses it each year to include the correct figures in your tax return.

It is worth getting a schedule for any investment property built after 1987. Even established properties with no Division 40 entitlement still benefit from Division 43 deductions, which can run into thousands of dollars per year. A buyers agent or your property manager can usually recommend a surveyor they have worked with before.

How ProfitPie models depreciation

When you analyse a property in ProfitPie, the platform estimates both Division 43 and Division 40 depreciation based on the property's age, type, and value. These estimates feed directly into your cash flow analysis and tax benefit calculation, so you can see the real after-tax holding cost from day one.

The estimate is designed to give you a realistic starting point before you commit to a purchase. Once you have a quantity surveyor report with the actual figures, you can enter those into ProfitPie for a precise projection. The platform also accounts for ownership structure differences, because the way depreciation offsets your income depends on whether you hold in your personal name, a trust, or a company.

Over a 30-year hold, depreciation can represent tens of thousands of dollars in cumulative tax savings. Getting the inputs right at the start makes a material difference to the accuracy of your long-term projections.

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