This article is general information only and does not constitute financial or tax advice. Consult a qualified tax professional for advice specific to your situation.
Key takeaways
- Rental property depreciation has two streams: Division 40 (plant and equipment like appliances and carpet) and Division 43 (the building structure at 2.5% of construction cost per year).
- Diminishing value gives you larger deductions in early years. Prime cost spreads deductions evenly. Once you choose a method for an asset, you cannot switch.
- If you bought an established property after 9 May 2017, you can only depreciate plant and equipment items you installed yourself, not items that came with the property.
- The second-hand rule does not apply to Division 43. You can claim capital works depreciation on the building structure regardless of when you purchased the property.
- A quantity surveyor's depreciation report can uncover $8,000 to $15,000 in annual deductions, and the fee for the report is itself tax-deductible.
Most landlords know they can claim mortgage interest and council rates at tax time. Fewer realise they are also entitled to claim the slow, invisible wear and tear on their property: the carpet gradually flattening, the hot water system ageing, the building structure itself losing value over decades. This is depreciation, and for many investment property owners it is one of the largest deductions they are not fully claiming.
This guide explains how depreciation works under Australian tax law, which method gives you more money back, and how to make sure you are not leaving anything on the table. For a broader look at what you can claim, see our complete guide to rental property tax deductions.
What Is Depreciation for a Rental Property?
When you buy a fridge or install new carpet, it does not last forever. The ATO recognises this and allows you to claim a deduction each year as those assets decline in value. Rather than claiming the full cost upfront, you spread the deduction over the asset's useful life.
There are two separate streams of depreciation for rental properties, governed by different divisions of the income tax legislation.
Division 40: Plant and Equipment
Division 40 covers the removable, mechanical items inside your property. Things that could reasonably be unbolted or lifted out. Think dishwashers, air conditioners, carpet, blinds, ceiling fans, smoke alarms, and hot water systems.
Each asset has an ATO-determined effective life, which sets how many years the deduction runs. A dishwasher has an effective life of eight years. A split-system air conditioner is ten years. A hot water system is twelve. These figures come from the ATO's taxation ruling TR 2022/1, and propkt has the most common ones built in so you do not need to look them up manually.
The second-hand asset rule
If you purchased an established property after 7:30pm AEST on 9 May 2017, there is an important restriction: you cannot depreciate plant and equipment assets that came with the property. Only new assets you install yourself, the carpet you replace, the air conditioner you add, are claimable.
This catches many landlords off guard. The carpet that was already in the unit when you settled is not claimable if you bought after that date. The carpet you rip out and replace is. propkt tracks whether each asset is new or second-hand and flags non-claimable items clearly so you know exactly where you stand.
Division 43: Capital Works
Division 43 covers the building structure itself and any structural improvements: the bricks and mortar, the roof, retaining walls, fixed tiling, internal walls, and major renovations that form part of the building.
The rate is straightforward: 2.5% of the original construction cost per year, for up to 40 years. For older buildings constructed between 18 July 1985 and 15 September 1987, the rate is 4% over 25 years. Buildings constructed before 18 July 1985 are not eligible.
Critically, the second-hand rule does not apply to Division 43. If the building was constructed after the cutoff date, you can claim capital works depreciation regardless of when you purchased the property.
A building that cost $400,000 to construct in 2005 would generate a $10,000 Division 43 deduction every year ($400,000 x 2.5%) for 40 years from construction. You do not need to have built it. You just need to know the original construction cost, which a quantity surveyor can establish for you.
Diminishing Value vs Prime Cost: Which Method Is Better?
For plant and equipment, you choose between two calculation methods. The choice matters because it determines how quickly your deductions front-load versus spread evenly across the asset's life.
Prime cost (straight line)
The prime cost method gives you the same deduction every year:
Deduction = cost x (days held / 365) x (100% / effective life)
A $2,000 carpet with an eight-year effective life gives you $250 every year for eight years.
Diminishing value
The diminishing value method front-loads the deductions into the early years. Each year's deduction is calculated on the remaining value, not the original cost:
Deduction = opening value x (days held / 365) x (200% / effective life)
Worked example, $2,000 carpet, eight-year effective life:
| Financial Year | Opening Value | Deduction | Closing Value |
|---|---|---|---|
| Year 1 | $2,000 | $500 | $1,500 |
| Year 2 | $1,500 | $375 | $1,125 |
| Year 3 | $1,125 | $281 | $844 |
| Year 4 | $844 | $211 | $633 |
Under diminishing value you claim $500 in year one. Under prime cost you claim $250. Same asset, same cost, but you get twice the deduction in year one with diminishing value.
Most landlords choose diminishing value for plant and equipment because the larger early deductions arrive when your holding costs are typically highest. If your property is negatively geared, those bigger early deductions feed directly into your deductible loss. Use the negative gearing calculator to see how depreciation affects your overall tax position. Capital works under Division 43 always uses prime cost. You do not get a choice there.
Once you pick a method for an asset, you cannot switch. Choose carefully at the time you add the asset to your records.
Effective Life: What It Means and Where to Find It
Effective life is the ATO's estimate of how long an asset will last before needing replacement. It is published in TR 2022/1 and updated periodically.
You must use the ATO's published effective life unless you have a reasonable basis to argue a shorter life applies to your specific circumstances. In practice, most landlords use the standard figures. Common ones for residential properties:
- Carpet: 8 years
- Air conditioner (split system): 10 years
- Hot water system: 12 years
- Oven or cooktop: 12 years
- Ceiling fan: 5 years
- Smoke alarm: 6 years
- Dishwasher: 8 years
propkt includes these figures automatically when you select an asset type, so you are not guessing or searching through ATO publications.
When to Get a Quantity Surveyor
A quantity surveyor is a construction cost specialist who can prepare a formal depreciation report for your property. For most landlords buying established properties, this is worth considering.
They will assess the property, estimate the original construction cost for Division 43 purposes, and identify and value all the plant and equipment items. A thorough report might find $8,000 to $15,000 in annual deductions that you had no record of.
The fee for a depreciation report is itself tax-deductible. As a rough guide, it makes sense to commission one if your property was built after 1987 and you have not had one done before. If you are installing new assets yourself, such as a new oven, new blinds, or carpet replacement, you simply enter those directly in propkt as you go.
For a full list of which expenses fall into which categories, see our guide to landlord expenses you can claim.
How propkt Automates Depreciation Calculations
Tracking depreciation manually is tedious. You need to remember the purchase date, original cost, effective life, and chosen method for every item across every property, then apply the right formula and pro-rate for partial years. Most landlords either skip it or hand a shoebox of receipts to their accountant and hope for the best.
propkt handles all of this. You add each asset once (cost, install date, and asset type) and the calculations run automatically for every financial year. The second-hand rule is tracked per asset. Partial years are pro-rated correctly from the day you install or the day the property first became income-producing, whichever is later.
At tax time, your depreciation schedule is ready to hand to your accountant: plant and equipment totals, capital works totals, and a full year-by-year breakdown per asset. It integrates directly into your tax summary report so your total deductions are accurate without any double-counting. Keep in mind that depreciation also reduces your cost base when you eventually sell, which affects your capital gains tax.
Calculate Your Depreciation
Enter the cost, effective life, and install date for any asset to see your year-by-year deductions under both methods.
Enter asset cost, purchase date and effective life to see your depreciation schedule.
The calculator compares diminishing value and prime cost side by side, so you can see exactly how each method plays out over the asset's full life. For ongoing tracking across all your assets and properties, propkt's depreciation tracking generates a complete schedule automatically at tax time. Get started free with your first property.