Investment Property Depreciation Guide: Div 40 & Div 43

Investment property depreciation is a non-cash tax deduction available to Australian property investors. It typically adds $5,000—$15,000 per year in claimable deductions on a residential rental property. Depreciation is split into two categories: Division 43 (the building structure, at 2.5% per year over 40 years) and Division 40 (plant and equipment such as carpet, blinds, and air conditioning, depreciated over their individual effective lives). A quantity surveyor report costing $500—$770 is generally needed to substantiate depreciation claims, and the cost of the report is itself tax deductible.

What is investment property depreciation?

Depreciation is a non-cash tax deduction that recognises the wear and tear on your investment property and its fixtures over time. You do not physically pay anything out of pocket, but it reduces your taxable income as if you did — increasing your tax refund or reducing your after-tax holding cost. For property investors, depreciation is often the most significant non-cash deduction available, particularly in the early years of ownership on newer properties.

The ATO allows two distinct types of depreciation claims on investment property:

• Division 43 — capital works deductions for the building structure itself
• Division 40 — deductions for plant and equipment (removable or mechanical items)

Understanding the difference between these two divisions — and the second-hand property rules introduced in 2017 — is necessary for claiming the correct deductions.

Division 43 vs Division 40: the key differences

	Division 43 (Capital works)	Division 40 (Plant and equipment)
What it covers	Building structure: walls, roof, foundations, built-in cupboards, sinks, doors, driveways, fencing	Removable/mechanical items: carpet, blinds, hot water system, air conditioning, appliances, smoke alarms
Depreciation rate	2.5% per year (40 years) for most residential; 4% for certain non-residential structures	Varies by item (5—15 year effective lives typical)
Total depreciation period	40 years from construction completion	Varies by each item’s effective life
Method available	Prime cost only (straight-line)	Prime cost or diminishing value (your choice)
Second-hand properties	Can be claimed (if built after 15 Sep 1987)	Cannot be claimed on second-hand items if property purchased after 9 May 2017
Effect on CGT cost base	Reduces cost base (increases capital gain at sale)	Does not reduce the property’s cost base
Evidence required	Quantity surveyor report (to estimate original construction cost)	Quantity surveyor report or purchase receipts (new items)
Typical annual deduction	$3,000 — $10,000	$2,000 — $8,000 (higher in early years)

How does Division 43 capital works depreciation work?

Division 43 covers the building structure itself — walls, roof, foundations, and permanently fixed structural items like built-in cupboards, sinks, doors, driveways, and fencing. The deduction rate is 2.5% per year of the original construction cost, claimed over 40 years using the prime cost (straight-line) method only (ATO — Capital works deductions (Div 43)).

To be eligible for Division 43:

• The building must have been constructed after 15 September 1987 for residential rental property (ATO — Work out your capital works deductions)
• The property must be used to produce assessable income (rented or genuinely available for rent)
• A quantity surveyor report is generally needed to estimate the original construction cost

Second-hand properties qualify for Division 43. When you purchase a second-hand property, you inherit the remaining depreciation based on the original construction cost and date. You claim the same annual amount the original owner would have — there is no reset.

Important: certain non-residential structures — such as those used for manufacturing, industrial storage, or primary production — may qualify for a 4% per year depreciation rate (over 25 years) instead of the standard 2.5%. Most standard residential investment properties use the 2.5% rate.

Division 43 example

A property built in 2010 with a construction cost of $300,000:

• Annual Div 43 deduction: $7,500 ($300,000 x 2.5%)
• If purchased in 2025: 15 years used, 25 years remaining
• Remaining Div 43 deductions: $7,500/year for 25 years = $187,500 total

For an investor in the 30% marginal tax bracket, the $7,500 annual deduction saves $2,250 in tax each year — without spending a dollar.

Division 43 reduces your CGT cost base

Every dollar of Division 43 depreciation you claim reduces the property’s cost base when you eventually sell, which increases the capital gain subject to CGT. However, the 50% CGT discount (for assets held more than 12 months) means the eventual CGT impact is typically less than the cumulative annual tax savings. Over 10 years of holding, the Div 43 deductions save far more in annual tax than the additional CGT at sale. See our CGT guide for details on how cost base adjustments work.

How does Division 40 plant and equipment depreciation work?

Division 40 covers removable or mechanical items within the property — things that are not part of the building structure. Each item is depreciated over its ATO-determined effective life (ATO — Depreciating assets in rental properties). You can choose either the prime cost or diminishing value method for each item.

Common Division 40 items and effective lives

Item	Effective life	Prime cost rate	Diminishing value rate
Carpet	8 years	12.5%/yr	25.0%/yr
Blinds and curtains	5 years	20.0%/yr	40.0%/yr
Hot water system	12 years	8.3%/yr	16.7%/yr
Air conditioning (split system)	10 years	10.0%/yr	20.0%/yr
Dishwasher	7 years	14.3%/yr	28.6%/yr
Oven / cooktop	12 years	8.3%/yr	16.7%/yr
Smoke alarms	6 years	16.7%/yr	33.3%/yr
Range hood	10 years	10.0%/yr	20.0%/yr
Garage door (electric)	10 years	10.0%/yr	20.0%/yr
Exhaust fans	10 years	10.0%/yr	20.0%/yr

Effective lives are published by the ATO in TR 2019/5 and updated periodically.

What changed on 9 May 2017 for Division 40?

The Treasury Laws Amendment (Housing Tax Integrity) Act 2017 (Legislation — Treasury Laws Amendment (Housing Tax Integrity) Act 2017) restricts Division 40 claims on residential rental properties purchased on or after 9 May 2017. Under these rules:

• Pre-May 2017 purchases: You can claim Div 40 on all items, including second-hand items already in the property at purchase
• Post-May 2017 purchases: You can only claim Div 40 on new items you purchase and install yourself — not second-hand plant and equipment already in the property

Division 43 is not affected by this rule. Second-hand buildings can still be depreciated under Div 43 regardless of when you purchased the property.

This is the most common source of confusion in property depreciation. If you purchased after May 2017, the carpet, blinds, and hot water system that were already in the property when you bought it are not claimable under Div 40. But if you replace the carpet with new carpet after settlement, that new carpet is claimable.

Prime cost vs diminishing value: which method to choose?

For Division 40 items, you can choose either the prime cost or diminishing value method. Division 43 uses only the prime cost method (2.5% per year).

Prime cost (straight-line): Equal deductions each year over the item’s effective life.

Diminishing value: Higher deductions in early years that decline over time. The formula is: base value x (days held / 365) x (200% / effective life) (ATO — Prime cost and diminishing value methods).

Numerical comparison: $3,000 carpet (8-year effective life)

Year	Prime cost deduction	Diminishing value deduction
1	$375	$750
2	$375	$563
3	$375	$422
4	$375	$316
5	$375	$237
6	$375	$178
7	$375	$133
8	$375	$100
Total	$3,000	$2,699

Diminishing value provides larger deductions in years 1—3 (the period when most investors benefit most from cash flow), but the total claimed over the full life of the asset may be slightly lower due to rounding thresholds. Prime cost provides consistent, predictable deductions.

Choose diminishing value if you want to maximise early-year cash flow. Choose prime cost if you prefer even, predictable deductions. Once chosen for a particular item, you generally cannot switch.

Worked example: 5-year depreciation schedule

The following example shows combined Division 43 and Division 40 depreciation for a property purchased in 2024, built in 2015, with a construction cost of $280,000. The investor installs $12,000 worth of new plant and equipment items after settlement (new carpet $3,000, new blinds $1,500, new split-system air conditioner $2,500, new dishwasher $1,200, new oven $2,000, new hot water system $1,800). Diminishing value method used for Div 40.

Division 43 (building — prime cost only)

Year	Construction cost	Rate	Annual deduction
1 (2025-26)	$280,000	2.5%	$7,000
2 (2025-26)	$280,000	2.5%	$7,000
3 (2026-27)	$280,000	2.5%	$7,000
4 (2027-28)	$280,000	2.5%	$7,000
5 (2028-29)	$280,000	2.5%	$7,000

Division 40 (plant and equipment — diminishing value)

Item (cost)	Year 1	Year 2	Year 3	Year 4	Year 5
Carpet ($3,000, 8yr)	$750	$563	$422	$316	$237
Blinds ($1,500, 5yr)	$600	$360	$216	$130	$78
Air con ($2,500, 10yr)	$500	$400	$320	$256	$205
Dishwasher ($1,200, 7yr)	$343	$245	$175	$125	$89
Oven ($2,000, 12yr)	$333	$278	$231	$193	$161
Hot water ($1,800, 12yr)	$300	$250	$208	$174	$145
Div 40 total	$2,826	$2,096	$1,572	$1,194	$915

Combined depreciation schedule

Year	Div 43	Div 40	Total depreciation	Tax saving (30% rate)
1 (2025-26)	$7,000	$2,826	$9,826	$2,948
2 (2025-26)	$7,000	$2,096	$9,096	$2,729
3 (2026-27)	$7,000	$1,572	$8,572	$2,572
4 (2027-28)	$7,000	$1,194	$8,194	$2,458
5 (2028-29)	$7,000	$915	$7,915	$2,375
5-year total	$35,000	$8,603	$43,603	$13,081

Over 5 years, this investor claims $43,603 in depreciation deductions — generating approximately $13,081 in tax savings at the 30% marginal rate — without spending a dollar beyond the one-off quantity surveyor fee. The Div 43 component ($7,000/year) remains constant, while the Div 40 component is highest in year 1 and tapers off under the diminishing value method.

Why you need a quantity surveyor report

A tax depreciation schedule prepared by a qualified quantity surveyor is the standard way to document both Division 43 and Division 40 deductions. In most cases, you need one. The report typically costs $500—$770 and the fee is itself tax deductible in the year you pay it.

What the report covers

• Estimated original construction cost (for Div 43), even if you did not build the property
• Itemised list of all plant and equipment with effective lives (for Div 40)
• Year-by-year depreciation schedule for up to 40 years
• Both diminishing value and prime cost calculations so you can choose
• Identification of items you may not have considered (exhaust fans, garage motors, clotheslines, garden irrigation)

Example cost vs deduction

A property with $8,000/year in total depreciation and an investor on the 30% marginal tax rate generates $2,400/year in tax savings. The one-off report cost is typically $500—$770.

Any property built after September 1987 is likely to have Division 43 deductions available. New items you install are claimable under Division 40 regardless of the property’s age.

When you might not need one

• If the property was built before 18 July 1985 and you have not done renovations (Div 43 generally not available; Div 40 only applies to eligible assets you purchase)
• If you only want to claim Div 40 on new items you installed yourself (you can use purchase receipts directly)
• If you already have a report from a previous owner or your conveyancer has one (ask before commissioning a new report)

What are the most common depreciation mistakes?

1. Not claiming depreciation at all. Many investors assume depreciation only applies to new properties. A depreciation schedule typically identifies $5,000—$15,000/year in non-cash deductions for eligible properties.
2. Claiming Div 40 on second-hand items (post-May 2017). If you purchased the property after 9 May 2017, only new items you install are eligible for Div 40. Claiming second-hand items will be disallowed by the ATO.
3. Forgetting that Div 43 affects CGT. Division 43 deductions reduce your cost base when you sell. Plan for this — but in most cases, the annual tax savings outweigh the eventual CGT impact, particularly with the 50% CGT discount.
4. Not getting a quantity surveyor report. Estimating depreciation yourself is unreliable and may not be accepted by the ATO. The report cost ($500—$770) is a deductible expense.
5. Confusing depreciation with repairs. Replacing a like-for-like item (for example, an old hot water system with a new one of similar type and standard) may be treated as an immediate repair deduction rather than a Div 40 depreciable asset. The correct treatment depends on the specifics. Consult your tax agent.
6. Missing renovations done by previous owners. If a previous owner renovated the property (for example, a new kitchen or bathroom), those renovation costs may be claimable under Div 43 or Div 40, even if you did not do the work. A quantity surveyor can identify and value these.

How can you estimate your depreciation impact?

The negative gearing calculator estimates how depreciation affects the after-tax holding cost. Enter estimated annual Div 43 and Div 40 amounts alongside other expenses to see the combined tax offset.

The premium spreadsheet tracks depreciation year by year alongside CGT cost base adjustments, rental yield, land tax, and multi-year cash flow projections, modelling both prime cost and diminishing value methods.

Disclaimer

This guide is general information only and is not tax advice or financial advice. Depreciation rules are detailed and depend on your circumstances, the property type, construction date, and when you purchased it. The worked example uses illustrative figures and may not reflect your situation. Consider speaking with a registered tax agent or qualified quantity surveyor for advice specific to your situation.