Depreciation Calculator

Depreciation is a tax deduction that reflects the wear and tear on your rental property and the assets inside it. Every year, your carpet gets a little more worn, your hot water system ages, and the building structure itself deteriorates. The ATO allows you to claim a deduction for this decline in value, even though you haven't spent any money that year to earn it. That makes depreciation one of the most valuable rental property tax deductions available to Australian landlords.

There are two separate categories of depreciation, each governed by different rules.

Division 40: Plant and equipment. This covers the removable, mechanical items inside your property. Dishwashers, air conditioners, carpet, blinds, ceiling fans, smoke alarms, and hot water systems all fall under Division 40. Each asset has an ATO-determined effective life that dictates how many years the deduction runs. A split-system air conditioner has an effective life of 10 years. A hot water system is 12 years. You choose either the diminishing value or prime cost method for each asset (more on that below).

Division 43: Capital works. This covers the building structure itself: the bricks, the roof, internal walls, fixed tiling, plumbing embedded in the structure, and retaining walls. Division 43 deductions are calculated at a flat rate of 2.5% per year for up to 40 years, based on the original construction cost.

The second-hand asset rule. If you purchased an established property after 7:30pm AEST on 9 May 2017, you cannot claim Division 40 depreciation on plant and equipment that came with the property. Only new items you install yourself are claimable. Division 43 capital works deductions are not affected by this rule.

For a detailed walkthrough of both categories, see our guide on how to calculate depreciation on your rental property.

For Division 40 plant and equipment, the ATO gives you a choice between two depreciation methods. The method you pick determines how your deductions are spread across the life of the asset. Once you choose a method for a specific asset, you cannot switch later, so it's worth understanding both before you commit.

Prime cost (straight line). The prime cost method spreads the deduction evenly across the asset's effective life. The formula is:

Deduction = Asset cost x (days held / 365) x (100% / effective life)

A $1,800 dishwasher with a 10-year effective life gives you $180 per year, every year, for 10 years. Simple and predictable. This method makes sense if you plan to hold the property for the full effective life of the asset and want consistent deductions year on year.

Diminishing value (front-loaded). The diminishing value method gives you larger deductions in the early years and smaller ones later. Each year's deduction is calculated on the remaining written-down value, not the original cost. The formula is:

Deduction = Opening written-down value x (days held / 365) x (200% / effective life)

That same $1,800 dishwasher would give you a $360 deduction in year one under diminishing value, compared to $180 under prime cost. In year two, the deduction drops to $288, then $230, and so on. You claim more upfront but less over time.

Which should you choose? Most landlords choose diminishing value for plant and equipment because the bigger early deductions arrive when holding costs are typically highest, particularly if you're negatively geared. If you're on a higher marginal tax rate now and expect to be on a lower one later (approaching retirement, for example), diminishing value can be especially beneficial.

Capital works under Division 43 always uses the prime cost method at 2.5% per year. You don't get a choice there.

The capital works deduction is often the single largest depreciation claim available to landlords, yet it's the one most commonly missed by people who don't get a depreciation schedule prepared. It covers the building structure itself, not the items inside it.

The rates. For residential properties constructed after 15 September 1987, the deduction rate is 2.5% of the original construction cost per year, running for 40 years. For properties built between 18 July 1985 and 15 September 1987, the rate is 4% per year over 25 years. Properties built before 18 July 1985 are not eligible for capital works deductions at all.

What it covers. Division 43 includes the structural shell of the building: foundations, external and internal walls, roofing, built-in cupboards, fixed flooring, plumbing and electrical wiring embedded in the structure, and any extensions or renovations classified as capital works. Structural renovations you carry out also qualify, with their own 40-year deduction period starting from the date they are completed.

The construction cost is what matters. The deduction is based on the original cost of construction, not the price you paid for the property. A unit you bought for $600,000 might have cost $350,000 to build. Your Division 43 deduction would be $8,750 per year ($350,000 x 2.5%), regardless of what you paid at settlement. A quantity surveyor can estimate the original construction cost for properties where no building records exist. Their fee is itself tax-deductible.

Second-hand properties are still eligible. Unlike the Division 40 restrictions introduced in 2017, capital works deductions apply to all owners of the building, whether you built it or bought it second-hand. As long as the construction date falls within the eligible range, you can claim. This is a significant benefit that many landlords buying established properties don't realise they have.

For a full picture of what you can claim, read our complete guide to rental property tax deductions.

Let's walk through a concrete example so you can see how the numbers work in practice.

The property. You buy a 2010-built apartment in Melbourne for $550,000. The original construction cost was $320,000. After settling, you install a new split-system air conditioner ($2,400) and replace the carpet ($3,000).

Division 43 (capital works). The building was constructed after September 1987, so it qualifies at 2.5% per year. The deduction is $320,000 x 2.5% = $8,000 per year. This will continue for the remaining years of the 40-year period from the original construction date. Since the building was constructed in 2010, there are roughly 24 years of deductions still available.

Division 40 (plant and equipment), using diminishing value.

• Air conditioner ($2,400, 10-year effective life): Year 1 deduction = $2,400 x 200% / 10 = $480. Year 2 = ($2,400 - $480) x 20% = $384.
• Carpet ($3,000, 8-year effective life): Year 1 deduction = $3,000 x 200% / 8 = $750. Year 2 = ($3,000 - $750) x 25% = $562.

First full year total. Your total depreciation deduction in year one is $8,000 (capital works) + $480 (air conditioner) + $750 (carpet) = $9,230. If you're on the 37% marginal tax rate, that's a tax saving of roughly $3,415, without spending a dollar beyond the assets you already installed.

Note that if you bought the apartment second-hand after May 2017, you can only depreciate the air conditioner and carpet because you installed them new. Any plant and equipment that was already in the apartment when you bought it (existing oven, existing blinds) is not claimable under Division 40. Division 43 deductions on the building itself remain fully available.

In the second year, total depreciation drops to $8,000 + $384 + $562 = $8,946. The Division 43 portion stays constant while the Division 40 portion gradually declines under diminishing value.

Depreciation is one of the most valuable deductions available, but it's also one of the easiest to get wrong. Here are the mistakes we see most often.

Not claiming depreciation at all. Many landlords, particularly those managing properties themselves, simply don't claim depreciation because they don't understand it or assume they need expensive professional help for every item. While a quantity surveyor is recommended for Division 43 claims on existing buildings, you can track Division 40 depreciation on new items you install yourself using the purchase price and ATO effective life figures.

Missing Division 43 capital works entirely. Even landlords who claim depreciation on their dishwasher and carpet sometimes miss the building structure deduction. For a property built after 1987, Division 43 is often worth $5,000 to $12,000 per year. Skipping it means leaving serious money on the table. If you haven't had a depreciation schedule prepared and your property was built after 1985, it's worth getting one done.

Claiming second-hand assets purchased after May 2017. If you bought an established property after 9 May 2017, you cannot claim Division 40 depreciation on the plant and equipment that was already there. Claiming those items is an error the ATO can pick up, and it can result in an amended assessment. Only claim Division 40 on items you've installed new.

Choosing the wrong method without thinking it through. The choice between diminishing value and prime cost is permanent for each asset. If you pick prime cost on an asset you'll replace in five years (well short of its effective life), you'll have claimed less depreciation than you could have under diminishing value. Think about your holding period and cash flow needs before choosing.

Not pro-rating for partial years. If you install an asset partway through the financial year, the deduction must be pro-rated based on the number of days held. Claiming a full year's deduction for an air conditioner installed in April will overstate your claim. The same applies to capital works if the property was not available for rent for the entire year.

Getting depreciation right from the start saves you from corrections later. For more on common tax mistakes landlords make, see our guide to landlord expenses you can claim.