Depreciation schedules for investment properties: what they cover and what they save

A $750,000 Brisbane investment property bought new can deliver $15,000 to $18,000 of depreciation deductions in its first year. At a 37% marginal tax rate that's roughly $5,500 to $6,700 back in your pocket. A quantity-surveyor schedule to claim those deductions costs $700 to $900 once, and the cost itself is deductible. The math is so favourable that the only investors not running depreciation are the ones who don't know it exists or assume it doesn't apply to them.

Here is what a depreciation schedule actually contains, how Division 43 and Division 40 split the deductions, and what changes for second-hand versus brand-new property under the post-2017 ATO rules.

The two divisions

The Australian Taxation Office splits depreciable property deductions into two categories under the Income Tax Assessment Act, and they behave very differently.

Division 43 (capital works). This covers the building structure itself: the slab, frame, walls, roof, windows, fixed cabinetry, tiles, ducted air conditioning, and anything bolted permanently to the structure. Division 43 runs at 2.5% per year for 40 years on the construction cost, on a straight-line basis. A $400,000 construction cost depreciates at $10,000 a year, every year, for four decades.

Division 40 (plant and equipment). This covers the removable assets inside the building: carpets, blinds, appliances, hot water systems, ceiling fans, smoke alarms, light fittings, and similar items. Each asset has its own effective life in the ATO ruling, and most depreciate faster than 2.5% per year. A $2,500 dishwasher with a 10-year effective life depreciates roughly $250 a year on straight-line, or more aggressively on diminishing-value.

Division 40 is where the front-loaded deductions live. A new property typically generates $4,000 to $7,000 of plant-and- equipment depreciation in year one, tapering off as items approach the end of their effective life.

The 2017 second-hand rule that catches everyone

Before 9 May 2017, you could buy a 10-year-old apartment and claim Division 40 depreciation on the existing carpets, blinds, and appliances at their reset value. The federal budget that year removed that for second-hand residential property bought after the cutoff. If you buy an established home as an investment now, you can't claim Division 40 on assets that existed at settlement. You can claim Division 43 (capital works) and you can claim Division 40 on assets you install yourself after settlement.

The practical effect: for most second-hand residential property, depreciation now means Division 43 only, plus any new appliances and fittings the owner installs. The schedule is still worth getting, the deduction is still real, but the first-year number is materially smaller than for a brand-new purchase.

Brand-new property keeps the full Division 40 plus Division 43 package. So does new construction by an investor (build to rent, knockdown-rebuild that becomes a rental, or a substantial renovation where the owner pays for the new fit-out themselves). The knockdown-rebuild article works through the construction-cost stack that becomes the Division 43 base.

What a quantity surveyor actually does

A registered quantity surveyor (the ATO recognises them as the appropriate professional for residential depreciation) does three things. They estimate the original construction cost from plans or by inspection, they list every Division 40 asset on site with its remaining effective life, and they produce a schedule that maps both into 40 years of annual deductions in a format your accountant can drop straight into your tax return.

For a brand-new property the surveyor uses builder records or plans. For an older property they site-inspect, measure, and estimate using ATO benchmarks. Either way the schedule comes out as a year-by-year table running the full 40 years, with Division 43 (steady) and Division 40 (front-loaded) summed.

The fee runs $700 to $900 most years. It's a one-off. The schedule itself is fully tax-deductible in the year you pay for it, so the after-tax cost at a 37% marginal rate is roughly $440 to $570. The first year of deductions almost always pays for the schedule several times over.

Worked example: $750k brand-new Brisbane house

Take a $750,000 brand-new four-bedroom house in a Brisbane growth corridor, owner-occupier-grade finishes, bought as an investment in 2026. The land value is roughly $300,000 and the construction cost is around $450,000 (a number a quantity surveyor will refine, but it's a reasonable working figure for a project home of that size and finish).

Division 43 deductions in year one:

• Construction cost base: $450,000
• Annual rate: 2.5%
• Year-one Division 43 deduction: $11,250
• That same $11,250 repeats every year for 40 years

Division 40 deductions in year one (using diminishing-value, which front-loads faster than straight-line):

• Carpets, blinds, light fittings, appliances, hot water, ducted air conditioning components, smoke alarms, landscaping plant: roughly $25,000 of effective base value.
• Year-one Division 40 deduction (diminishing-value blended): roughly $5,500 to $6,500.

Total year-one deduction: $16,750 to $17,750. At a 37% marginal rate the tax refund attributable to depreciation alone is $6,200 to $6,570. At a 45% rate it's $7,500 to $8,000. These deductions are non-cash, which means they reduce your tax bill without reducing your bank balance.

Year five deductions on the same property look different. Division 43 still prints $11,250 (it doesn't change for 40 years). Division 40 has tapered to roughly $1,500-$2,500 as the front-loaded assets approach the back of their effective life. Total deduction year five: roughly $13,000-$13,750. The Division 43 line is the workhorse; Division 40 is the kicker that fades.

How depreciation interacts with cash flow and tax

Depreciation deductions don't require cash to leave your account. The roof doesn't actually depreciate evenly each year by $250; the ATO just lets you claim that as if it did. That's why depreciation is the deduction that turns a slightly cash-flow-negative property into a tax-positive one.

Worked example continued. The same Brisbane property runs the following pre-tax numbers in year one:

• Rent at $620/week: $32,240
• Loan interest on $600,000 at 6.2%: $37,200
• Outgoings (rates, insurance, management, vacancy, maintenance): $9,800
• Pre-tax cash loss: $14,760

Now layer in the $17,000 of depreciation. Tax-loss claim becomes roughly $31,760, which at a 37% marginal rate is a tax refund of $11,750. Real cash drain after the refund: $14,760 minus $11,750 equals $3,010. The depreciation alone shifted the after-tax holding cost from $14,760 to $3,010, a $11,750 swing per year before you even consider growth. That's the deduction's real economic value.

For the bigger-picture interaction with rental losses and the capital-gains-tax discount, the negative gearing article works through the mechanism end-to-end and stress-tests the underlying property thesis. Depreciation is the largest single deduction in most negatively-geared positions, and ignoring it makes the strategy look worse than it is.

The CGT clawback nobody mentions in the brochure

Division 43 deductions claimed during ownership reduce the cost base of the property when you sell. If you bought for $750,000 (with construction cost component $450,000) and held for 10 years claiming $112,500 of Division 43 across that decade, your CGT cost base falls from $750,000 to roughly $637,500. On a sale at $1.1M your taxable capital gain is $462,500 rather than $350,000 (before the 50% discount and cost-of-purchase adjustments).

That's a real partial clawback at exit. At a 37% marginal rate after the 50% CGT discount, the extra $112,500 of taxable gain costs roughly $20,800 in additional CGT. Across the same 10-year hold, the depreciation-driven tax refund was around $42,000 (Division 43 only, $11,250 a year times 10 at 37% marginal). Net benefit roughly $21,000 just from Division 43, before considering the time-value of getting deductions now and paying tax later.

Division 40 deductions don't reduce the property's cost base in the same way (they relate to plant-and-equipment balancing adjustments, not capital works), so the Division 40 deductions are largely net of CGT clawback. That's another reason why brand-new property generates better lifetime after-tax returns than second-hand for an investor: more Division 40 means more deductions that don't reverse on sale. Sketch your own scenario in the capital gains tax calculator and try toggling the cost base by the cumulative Division 43 figure to see the size of the clawback on your specific numbers.

Common mistakes

Skipping the schedule on second-hand property. Even without Division 40, the Division 43 capital-works deduction on a post-1985 property is real money. A 1990s townhouse with a $200,000 construction-cost component still generates $5,000 a year for the rest of the 40-year window.

Letting the schedule go stale after a renovation. Replace the kitchen, the bathroom, or any major Division 40 item, and the schedule needs an update. The new assets reset the depreciation clock; the disposed assets need balancing-adjustment treatment. Most quantity surveyors update their original schedule for a few hundred dollars rather than starting over.

Confusing repairs and improvements. A repair (replacing a broken tap with the same model) is a current-year deduction. An improvement (upgrading to a fancier fitting) is capital works depreciable over 40 years at 2.5%. The line matters at tax time and is one of the most common ATO audit triggers in the rental-property space.

What to do this week

If you bought an investment property in the past few years and don't have a depreciation schedule, you're leaving meaningful money on the table. The schedule can be backdated: the ATO allows amended returns for the prior two years, and a first-year deduction missed on a recent purchase is usually recoverable. Get a quantity surveyor quote, run the cost-benefit on the first year of recoverable deductions alone, and the answer is almost always to commission the schedule.

For investors weighing brand-new versus second-hand, the depreciation differential is one of the real reasons new builds keep finding investor buyers despite often softer growth than established stock. The Burbfinder suburb pages, paired with the rental-yield calculator, give you a defensible read on the underlying property economics; the depreciation schedule is the tax wrapper that determines how much of those economics you keep.