What is Depreciation?

The basic idea

Everything wears out. Carpet gets threadbare, a hot water system eventually gives up, paint fades. The ATO recognises this and lets you claim a deduction for that gradual decline in value, even though you're not writing a cheque for it. That's the whole point of depreciation, it's a non-cash deduction. The asset simply loses value over time, and the tax system lets you reflect that on your return without any money actually leaving your bank account. For everyday investors this comes up almost entirely with investment properties, and it can meaningfully reduce your taxable income each year, which is why it's worth understanding properly rather than leaving it on the table.

Division 43: the building structure

Division 43 covers the physical structure, the walls, roof, foundations, internal fit-out, driveways and other structural improvements. The rate is flat: 2.5% a year for up to 40 years, based on the original construction cost, not what you paid for the property. There's a hard cutoff on eligibility though: Division 43 only applies where construction commenced after 15 September 1987. Built before that, and you generally can't claim it on the original structure, though a later renovation done after the cutoff can still qualify in its own right. If you didn't build the property yourself, you'll almost always need a quantity surveyor's report to establish that original construction cost, the ATO doesn't accept a DIY estimate.

Division 40: plant and equipment

Division 40 covers the removable or mechanical stuff inside the property, carpets, hot water systems, ovens, air conditioners, blinds, dishwashers. Each asset has its own effective life set by the ATO, and you can calculate the deduction with either the prime cost method (the same amount every year) or the diminishing value method (a bigger deduction early on, tapering off). One rule that catches people out: since 1 July 2017, if you buy an established residential property, you generally can't claim Division 40 depreciation on the second-hand plant and equipment already in it, only on new assets you buy yourself after settlement. Brand-new properties aren't affected by this at all.

Worth knowing if you run a small business too: the instant asset write-off lets you deduct the full cost of an eligible asset under $20,000 in the year you start using it, instead of depreciating it over time. That threshold is locked in through 2025-26. A permanent extension from 1 July 2026 was announced in the 2026-27 Budget and was working its way through Parliament as this page was written, so check ato.gov.au to confirm it's actually passed before relying on it for a business purchase.

A worked example

Say you own a two-bedroom investment unit in Brisbane, built in 2015 for $280,000. Division 43: $280,000 x 2.5% = $7,000 a year. Division 40: a quantity surveyor identifies $18,000 worth of plant and equipment, and the diminishing value method might give you around $3,600 in year one. Combined, that's roughly $10,600 in year-one depreciation deductions, for an outlay of nothing beyond the cost of the report. This is exactly why depreciation is such a powerful lever in negative gearing, it widens the property's paper loss and offsets your other income without touching your actual cash flow. Our Negative Gearing Calculator lets you plug a depreciation figure straight in.

How it flows through your tax return

Rental income, minus allowable expenses like interest, rates, insurance, repairs and depreciation, equals your rental result for the year. If expenses beat income, that's a rental loss, and it offsets your other taxable income. The higher your marginal tax rate, the more each dollar of depreciation is worth: at a 37% marginal rate, a $10,000 depreciation deduction saves you $3,700 in tax. See our marginal tax rate glossary page for how that scales at different income levels.

The catch: depreciation and your CGT cost base

Division 43 deductions reduce your property's capital gains tax cost base. Every dollar you've claimed, or were entitled to claim, under Division 43 gets subtracted from your cost base when you sell. A lower cost base means a bigger capital gain, and potentially more CGT down the track. This applies whether or not you actually claimed the deduction, if you were entitled to it and didn't bother, your cost base is reduced anyway, so there's genuinely no upside to skipping it. Division 40 assets are handled separately through a balancing adjustment when you dispose of them, not a direct cost base reduction. Our Capital Gains Tax Calculator can help you see how that plays out at sale.

Common misconceptions

"I can only claim depreciation on a new property." Division 43 needs construction after 15 September 1987, but a renovation on an older property can still qualify on its own, and Division 40 is available in full on genuinely new properties. "It's too complicated to bother with." A quantity surveyor report typically costs $500 to $800 and can unlock thousands of dollars in deductions over the years, it usually pays for itself many times over. "I can estimate the construction cost myself." The ATO generally wants a qualified estimate, not a guess, so a QS report is the practical way to claim Division 43 with confidence.