Rental Property Depreciation Australia 2025–26: How to Maximise Your Tax Deductions
If you own a rental property in Australia, you’re probably already claiming deductions for interest, rates, and property management fees. But are you claiming depreciation? For many investors, depreciation is the single largest deduction they’re missing — and with the 31 October tax return deadline approaching, now is the time to get it right.
This guide explains how rental property depreciation works in Australia for the 2025–26 income year, what you can and can’t claim, and how to make sure you’re not leaving money on the table.
What Is Rental Property Depreciation?
Depreciation is the tax deduction you claim for the natural wear and tear of your property and its assets over time. The Australian Taxation Office (ATO) allows rental property owners to claim two types of depreciation:
- Division 43 — Capital Works Deductions: The building structure itself, including extensions, renovations, garages, driveways, and structural improvements.
- Division 40 — Plant and Equipment Depreciation: Separately identifiable assets such as appliances, carpets, curtains, blinds, and furniture.
Understanding the difference between these two categories is essential — they have different rules, rates, and eligibility requirements.
Division 43: Capital Works Deductions
Division 43 covers the building structure and qualifying structural improvements. The standard deduction rate is 2.5% of eligible construction expenditure per year, over 40 years.
What Qualifies as Capital Works?
- The building structure and extensions
- Garages, patios, and carports
- Major room renovations
- Driveways and retaining walls
- Fences and structural alterations
- Built-in items that form part of the building
Important: The deduction is based on the construction cost, not the purchase price of the property. Land, landscaping, and demolition costs are excluded.
When Can You Start Claiming?
You can only begin claiming Division 43 deductions once construction is complete and the property is being used — or genuinely available — to produce rental income. If the property is used privately for part of the year, you must apportion your deduction accordingly.
Example: If eligible construction expenditure is $200,000 and the standard 2.5% rate applies for a full income-producing year, the annual deduction would be $5,000.
Build-to-Rent Properties
A higher rate of 4% per year over 25 years applies to qualifying build-to-rent developments where construction commenced after 9 May 2023. This is a targeted concession with strict eligibility requirements — it does not apply to ordinary individually owned rental properties.
Division 40: Plant and Equipment Depreciation
Division 40 covers separately identifiable assets that are expected to decline in value over time. Common examples include:
- Dishwashers, refrigerators, washing machines, and ovens
- Furniture and fittings
- Carpets and floating timber flooring
- Curtains, blinds, and light fittings
- Air conditioning units
These assets are depreciated over their effective life using either the prime cost method (uniform deductions each year) or the diminishing value method (higher deductions in earlier years).
The Critical 2017 Rule: Second-Hand Assets
This is where many investors get caught out. Since 7:30 pm AEST on 9 May 2017, individuals generally cannot claim Division 40 depreciation on previously used (second-hand) assets in residential rental properties.
This means if you purchased an established property after that date, you generally cannot claim depreciation on the appliances, carpets, or furniture that came with it — even if they look brand new.
What you CAN still claim:
- New assets you purchase for the property (e.g., a new dishwasher you install)
- Division 43 capital works (the building structure and improvements)
- Assets acquired before 9 May 2017 (grandfathered)
- Assets in properties not used for residential accommodation
- Certain new residential premises where no other entity previously claimed depreciation
Moving an appliance from your own home into a rental property does not make it a “new” asset — it remains second-hand and is not deductible.
Immediate Deductions and Low-Value Pooling
Assets Costing $300 or Less
A depreciating asset costing $300 or less may qualify for an immediate deduction in the year it is first used for a taxable purpose. However, this rule does not apply if the asset forms part of a set that together costs more than $300.
Low-Value Pooling
You can choose to pool eligible assets into a low-value pool for simplified depreciation:
- Low-cost assets (costing less than $1,000): deducted at 18.75% in the first year, then 37.5% in subsequent years
- Low-value assets (opening adjustable value under $1,000): same rates apply
Pooling simplifies your record keeping, but it does not override the restriction on second-hand residential assets.
Repairs vs. Capital Improvements: Know the Difference
One of the most common mistakes rental property owners make is misclassifying capital improvements as repairs. The distinction matters significantly for your tax return.
Immediately Deductible Repairs and Maintenance
Repairs restore a damaged or deteriorated part of the property. Maintenance prevents deterioration. These are generally deductible in the year incurred, provided they relate to wear or damage that arose while the property was rented. Examples include:
- Fixing a leaking tap or broken window
- Repairing part of a damaged fence
- Repainting faded walls
- Cleaning a pool or oiling a deck
Capital Improvements (Not Immediately Deductible)
Expenditure is capital — not a repair — when it creates something new, makes the property more valuable, or replaces an entire structure. Examples include:
- Adding a new carport or deck
- Remodelling a bathroom
- Replacing an entire fence
Capital improvements may qualify as Division 43 capital works or Division 40 depreciating assets, but they cannot be claimed as an immediate deduction.
Watch Out for Initial Repairs
If damage or deterioration existed when you purchased the property, any work to fix it is an initial repair — even if you didn’t know about the defect at the time. Initial repairs are capital expenditure and are not immediately deductible.
Getting a Tax Depreciation Schedule
A tax depreciation schedule prepared by a qualified quantity surveyor is one of the most effective ways to maximise your rental property deductions. The schedule identifies and classifies:
- Division 43 construction expenditure and annual deductions
- Division 40 assets, effective lives, and depreciation calculations
- Renovations and structural improvements
- Projected deductions over future years
Where actual construction costs are unavailable (common with older properties), the ATO permits an estimate by a qualified quantity surveyor. The fee for the depreciation schedule is itself tax-deductible.
Even older properties can benefit from a depreciation schedule — later renovations and new assets may qualify even if the original structure predates the eligible construction period.
Depreciation and Capital Gains Tax (CGT)
Depreciation doesn’t just affect your annual tax return — it also has implications when you sell the property.
Division 43 deductions reduce your property’s CGT cost base. On disposal, the cost base must be reduced by capital works deductions claimed or entitled to be claimed — even if you didn’t actually claim them. This is a critical point: failing to claim an available Division 43 deduction does not preserve that amount in your cost base.
Division 40 assets are treated separately. On sale, the acquisition value allocated to those assets is removed from the property’s cost base, and disposal can trigger a balancing adjustment.
This is why accurate record keeping throughout your ownership period is so important.
Record Keeping Requirements
The ATO requires you to keep records for the full ownership period and at least five years after the relevant disposal. Essential records include:
- Purchase and sale contracts and settlement statements
- Construction commencement and completion dates
- Construction invoices and quantity-surveyor reports
- Asset invoices, acquisition dates, and depreciation calculations
- Repair, maintenance, and renovation invoices
- Evidence of rental availability and any private-use periods
Common Mistakes to Avoid
- Claiming depreciation on second-hand assets in a post-9 May 2017 residential property
- Treating structural items as plant and equipment (they belong under Division 43)
- Claiming initial repairs as immediate deductions
- Treating a full replacement as a repair (e.g., replacing an entire fence)
- Claiming the $300 immediate deduction for items that form part of a set costing more than $300
- Failing to apportion deductions for periods of private use
- Ignoring capital works deductions when calculating CGT on sale
Get Expert Help from TaxServe Australia
Rental property depreciation rules are complex, and the stakes are high — both for maximising your deductions and for avoiding ATO scrutiny. Whether you’re lodging your first rental property return or managing a growing portfolio, TaxServe Australia’s experienced tax professionals can help you claim every dollar you’re entitled to.
Contact TaxServe Australia today for a consultation with one of our rental property tax specialists. We’ll review your depreciation schedule, ensure your deductions are correctly classified, and help you lodge a compliant, optimised tax return before the 31 October deadline.
📞 Call us or visit taxserve.com.au to get started.