If there is one tax benefit that Australian property investors consistently underuse, it is depreciation. Unlike rent, interest, or management fees, depreciation is not a cash expense. You don’t write a cheque to claim it. You simply engage a qualified quantity surveyor to prepare a schedule, and the ATO allows you to claim the annual decline in value of your property’s building and its contents as a tax deduction each year.
For many investors, this single strategy generates $5,000 to $15,000 or more in additional annual deductions, producing thousands of dollars in real tax savings every year for a one-off cost of under $900. For properties that might otherwise be mildly negatively geared, depreciation can be the difference between a cash drain and a property that pays for itself after tax.
Here is everything Australian property investors need to understand about depreciation in 2026.
What Is Property Depreciation?
The ATO recognises that investment properties, like all physical assets, decline in value over time through normal wear and tear. Depreciation deductions allow investors to claim this theoretical decline in value as a tax deduction across two distinct categories.
Division 43: Capital Works (the building) Division 40: Plant and Equipment (the contents)
Getting the distinction between these two right is the foundation of a sound depreciation claim.
Division 43: Capital Works Deductions
Division 43 covers the structure of the building itself: the walls, roof, floors, concrete, brickwork, windows, doors, plumbing, and fixed elements. It also covers capital improvements made during your ownership, such as a new kitchen, bathroom renovation, or extension.
The deduction rate is 2.5% of the original construction cost per year, claimed over 40 years. This rate applies to residential buildings where construction commenced after 15 September 1987. Buildings constructed before this date have no Division 43 entitlement, though any capital improvements you make to such a property after purchase are still claimable at 2.5%.
An example: if a property’s eligible building construction cost is $300,000, the annual Division 43 deduction is $7,500 (2.5% of $300,000), regardless of what you paid for the property. This deduction continues for 40 years from the date construction was completed, or until the remaining claim runs out.
The important thing to understand is that Division 43 is based on the original construction cost, not your purchase price. This is one reason a quantity surveyor is needed: they have the tools and training to estimate or research original construction costs, which the ATO requires as the basis for the claim.
One interaction to be aware of: every dollar claimed under Division 43 during your ownership reduces your property’s cost base by the same amount. This increases your taxable capital gain when you eventually sell. A good accountant will factor this into your long-term modelling so there are no surprises at the point of sale.
Division 40: Plant and Equipment Deductions
Division 40 covers the removable assets within the property: items that could be taken out without significant damage to the building. This includes appliances, air conditioning units, hot water systems, carpets, blinds, ceiling fans, smoke alarms, and similar fixtures and fittings.
Each asset is assigned an effective life by the ATO (ranging from a few years to several decades depending on the item) and depreciated at either a fixed annual rate (the Prime Cost method) or an accelerating rate applied to the asset’s remaining value each year (the Diminishing Value method).
Most depreciation schedules use the Diminishing Value method because it front-loads deductions into the early years of ownership, producing larger tax savings when they’re most useful. For an investor in a higher marginal tax bracket, this is generally the more advantageous approach.
The critical 2017 rule change: Since 9 May 2017, Division 40 deductions can only be claimed on new plant and equipment. If you purchase an established (second-hand) residential property, you cannot claim depreciation on any pre-existing appliances, carpets, blinds, or other assets that were already in the property when you bought it. You can, however, claim depreciation on any new assets you install during your ownership.
This rule does not apply to new builds, where all plant and equipment is new and the full Division 40 deduction is available.
What a Depreciation Schedule Looks Like in Practice
Consider two illustrative examples using typical 2026 market scenarios.
Example 1: New apartment in Brisbane Purchase price: $620,000 Construction cost (QS estimate): $380,000 New appliances, air conditioning, carpets, and fittings: $45,000
Division 43 annual claim: $9,500 (2.5% of $380,000) Division 40 first-year claim (diminishing value): approximately $8,400 Total first-year depreciation: approximately $17,900
At a marginal tax rate of 37%, this produces a tax saving of approximately $6,620 in year one alone, for a schedule cost of around $800.
Example 2: Established house built in 1995 in Adelaide Purchase price: $580,000 Construction cost (QS estimate): $180,000 Pre-existing plant and equipment: not claimable (2017 rule) New split-system air conditioning installed post-purchase: claimable under Division 40
Division 43 annual claim: $4,500 (2.5% of $180,000) Division 40 first-year claim on new air conditioning: approximately $800 Total first-year depreciation: approximately $5,300
At a marginal rate of 32.5%, this produces a tax saving of approximately $1,720 per year, ongoing.
These are indicative figures. The actual deductions for any specific property depend on the construction date, the quality and quantity of plant and equipment, any improvements made, and how long the building has been depreciating. A quantity surveyor will calculate your specific entitlements accurately.
How Much Can You Save? The Numbers by Property Type
Industry data from quantity surveyor firms operating across Australia provides useful benchmarks for typical first-year depreciation claims:
- New house (2–3 bedroom): $8,000 to $14,000 in year one
- New apartment or townhouse: $10,000 to $19,000 in year one (higher due to common property inclusions)
- Established house built post-1987: $4,000 to $9,000 per year (Division 43 only)
- Established house built pre-1987: Limited or nil Division 43; any improvements you make still claimable
For an investor on a 37% marginal rate (income between $135,001 and $190,000), a $10,000 depreciation deduction produces a $3,700 tax saving. On a $15,000 deduction, the saving is $5,550. These are real dollars that remain in your pocket without any additional expenditure on the property.
Who Prepares a Depreciation Schedule?
The ATO requires that depreciation schedules be prepared by a qualified quantity surveyor. This is a legal requirement: accountants are not permitted to estimate construction costs or asset values for depreciation purposes unless they are also registered quantity surveyors.
Look for professionals who are members of the Australian Institute of Quantity Surveyors (AIQS). Major firms specialising in residential tax depreciation include BMT Tax Depreciation and Washington Brown, among others. Most offer a free upfront estimate of your likely first-year deductions before you commit to the fee.
The process typically involves:
- A physical inspection of the property (or in some cases, a remote assessment for simpler properties)
- Research into original construction costs and building specifications
- Identification and valuation of all plant and equipment items
- Preparation of a comprehensive report covering projected deductions over the remaining life of the property (typically 40 years)
The report shows both prime cost and diminishing value calculations for Division 40 items, allowing you and your accountant to choose the method that best suits your tax situation each year.
Cost of a schedule: Typically, $700 to $900 for a standard residential investment property in 2026. This fee is fully tax deductible as a property management expense in the year it is incurred. For most properties, the schedule pays for itself many times over in the first year of claims alone.
What If You’ve Never Claimed Depreciation Before?
This is more common than it should be. Many investors hold properties for years without ever commissioning a depreciation schedule, either because they weren’t aware of the deduction or because they assumed older properties had nothing to claim.
The good news: you can still act. The ATO allows individuals to amend tax returns for up to two prior years. If you’ve missed two years of depreciation claims, you may be able to recover those deductions by lodging amendments. For missed claims going further back, speaking directly with the ATO or your accountant about your options is worthwhile.
Going forward, commissioning the schedule now and applying the deductions from this financial year is the priority.
Investors who rely on their accountant to “estimate” depreciation without a formal schedule typically under-claim by 40% to 60% compared to a professionally prepared report. Quantity surveyors identify items that accountants commonly miss, including structural improvements made by previous owners and specialist plant and equipment items that don’t appear on standard checklists.
Depreciation and the 2026 Budget: What Changes, What Doesn’t
The 2026 Budget changes to negative gearing do not affect depreciation deductions directly. Division 43 and Division 40 deductions remain fully available on both new and established investment properties, regardless of when the property was purchased.
What does change is how the tax benefit of those deductions flows through. For investors who purchased established properties after 12 May 2026, rental losses (including those created or deepened by depreciation claims) can no longer be offset against salary income from 1 July 2027. Those losses are carried forward to offset future rental income or capital gains from the same property.
For new builds purchased after 12 May 2026, full negative gearing remains intact, meaning depreciation deductions that push the property into a net loss can still reduce your salary tax in the year they’re claimed.
The practical effect: depreciation is still enormously valuable for all investors. For those with established properties bought post-Budget, the benefit is deferred rather than eliminated. For new-build investors, the full immediate benefit remains.
Checklist: Maximising Your Depreciation Claims
Before your next tax return, work through these key questions:
- Do you have a current depreciation schedule prepared by a registered quantity surveyor?
- Was the property built after 15 September 1987? (If yes, Division 43 likely applies)
- Have you installed any new plant and equipment since purchase? (Claimable under Division 40 regardless of purchase date)
- Have you made any capital improvements, such as a new kitchen or bathroom? (Claimable under Division 43 from the date the work was completed)
- Has your accountant received a copy of the depreciation schedule and included all relevant claims in your return?
- If you’ve never commissioned a schedule, have you requested a free estimate from a AIQS-registered quantity surveyor?
The Bottom Line
Depreciation is the closest thing property investors have to free money within the tax system. It costs you nothing to earn, requires no ongoing work beyond providing access for the initial inspection, and produces real, recurring tax savings for as long as you hold the property.
If you own an investment property and don’t have a current depreciation schedule, commissioning one is one of the highest-returning steps you can take this financial year. The investment is under $900. The return, for most investors, is measured in thousands of dollars per year, every year, for decades.
If you’d like a referral to a trusted quantity surveyor or guidance on how depreciation fits into your overall investment strategy, our team is happy to help.
Disclaimer: This article is intended as general information only and does not constitute tax or financial advice. Depreciation rules and entitlements depend on individual property circumstances. The 2017 plant and equipment rules and 2026 Budget changes referenced are subject to ongoing legislative interpretation. Always work with a registered quantity surveyor and qualified accountant for advice specific to your property.
