Capital Works Deduction Explained: The Quiet Half of Property Depreciation

Ask most investors about depreciation and they will talk about ovens, carpets and air conditioners. Those are the visible deductions. But for the majority of Australian investment properties, the larger and steadier deduction is the one nobody notices the capital works deduction, claimed under Division 43 of the tax legislation.

It is not glamorous. It does not change year to year. And on a typical established rental property, it often accounts for well over half of the total deductions available. This guide covers what the capital works deduction is, what qualifies, how construction dates affect eligibility, and one consequence that catches a lot of investors out when they eventually sell.

What is the capital works deduction?

The capital works deduction lets owners of income-producing property claim the construction cost of the building's structure and permanently fixed items as a tax deduction, generally at 2.5% per year over 40 years from the date construction was completed. It covers the bricks, concrete, roofing, walls, tiling and fixed structural improvements as distinct from removable plant and equipment, which is deducted separately under Division 40.

Two things follow from that definition, and both matter.

First, the deduction is based on original construction cost, not what you paid for the property and not what it is worth today. A Perth townhouse that cost $310,000 to build in 2012 generates capital works deductions based on that $310,000, regardless of whether you bought it for $520,000 or $900,000.

Second, the 40-year clock starts at completion of construction, not at your purchase date. Buy a property built in 2010 and you inherit the remaining years of a clock that started then in this case, roughly 24 years remaining as at 2026.

The 2.5% rule, and where 4% applies

The rate depends on when construction started and what the building is used for.

Construction commenced	Property type	Rate	Period
Before 18 July 1985	Residential	Generally not deductible	–
18 July 1985 – 15 Sept 1987	Residential	4%	25 years
On or after 16 Sept 1987	Residential	2.5%	40 years
On or after 20 July 1982	Non-residential (certain uses)	2.5% or 4% depending on date and use	25–40 years
On or after 27 Feb 1992	Structural improvements (fences, driveways, retaining walls, sealed car parks)	2.5%	40 years

The 16 September 1987 date is the one that matters most in practice. It is why a 1970s weatherboard cottage in Adelaide may produce no capital works deduction on the original structure at all while a 2004 extension to that same cottage produces a full deduction on the extension.

That distinction is regularly missed. An older building is not automatically a dead end. Later renovations, extensions and structural improvements each carry their own construction date and their own eligibility.

What qualifies as capital works

Qualifies (Division 43)	Does not qualify under Division 43
Foundations, slab, structural framing	Carpet and loose floor coverings
Brickwork, cladding, render, external walls	Ovens, cooktops, rangehoods, dishwashers
Roof structure and roof coverings	Air conditioning units and hot water systems
Internal walls, ceilings, doors, windows	Blinds, curtains and light shades
Tiling and permanently fixed floor coverings	Furniture and freestanding appliances
Built-in cabinetry, kitchen and bathroom joinery	The land itself land is never depreciable
Plumbing, ducting and electrical cabling (fixed)	Landscaping and soft plants
Driveways, retaining walls, fencing, sealed car parks, in-ground pool shells	Standard repairs and maintenance (deductible immediately instead)
Professional fees and preliminaries forming part of the construction cost	Purchase price of the land component

The items on the right are not lost most fall under Division 40 plant and equipment, which has a completely different depreciation profile and different eligibility rules following the 2017 changes. The distinction between the two is worth understanding properly, and we cover it in detail in Division 40 vs Division 43 depreciation.

The critical practical difference: Division 43 capital works deductions were not affected by the 2017 second-hand plant and equipment restrictions. Investors who bought an established residential property after 9 May 2017 may be limited on Division 40 claims, but the capital works deduction on the building remains available. For many post-2017 purchasers, it is now the majority of their depreciation claim which is exactly why it deserves more attention than it gets.

Renovations done by a previous owner still count

This is the single most valuable thing many investors do not realise. If a previous owner spent $85,000 renovating the kitchen, bathrooms and roof in 2016, and you bought the property in 2023, you can generally claim capital works deductions on that qualifying renovation work even though you did not pay for it and may not know exactly what it cost.

You do not need the previous owner's invoices. Where actual costs are unavailable, a qualified quantity surveyor can prepare an estimate of the construction cost, which is the accepted method for establishing the deductible amount. This is the core purpose of a quantity surveyor report.

Practically, this means an older property that looks like a poor depreciation candidate on paper can be a strong one in reality. A 1978 brick home in Brisbane produces nothing on the original structure but if it was extended in 2003, re-roofed in 2011 and had a full bathroom and kitchen renovation in 2018, each of those carries its own eligible construction cost.

A worked example

Consider a two-bedroom apartment in Melbourne, completed in 2015, purchased by an investor in 2024 for $640,000.

Item	Amount
Estimated original construction cost (building only)	$265,000
Annual capital works deduction at 2.5%	$6,625
Years remaining on the 40-year period from 2015	29 years
Total remaining capital works deductions	approximately $192,000
Investor's marginal tax rate	37% + Medicare levy
Approximate annual tax effect of the capital works deduction alone	around $2,550

That $6,625 is claimed every year, unchanged, without any further outlay. Plant and equipment deductions in the same property might add a few thousand in the early years before tapering. The capital works deduction is the flat, dependable base underneath everything else.

Note that the deduction only applies for the portion of the year the property was genuinely available for rent, and is apportioned for part-year ownership.

The part that catches people out: capital works and CGT

Here is the consequence most investors do not hear about until they sell. Capital works deductions you have claimed generally reduce the cost base of the property for capital gains tax purposes. Claim $6,625 a year for ten years and the cost base is reduced by roughly $66,250, which increases the assessable capital gain by the same amount when you sell. This is not a reason to skip the deduction. In most cases the arithmetic still favours claiming, because:

• You get the benefit now at your full marginal rate, and the CGT impact arrives years later

• The 50% CGT discount, where it applies to assets held over 12 months, means the eventual gain is often taxed at an effective rate lower than the rate at which you claimed the deduction

• Money now is worth more than money in fifteen years

There is also an important detail: the cost base reduction generally applies whether or not you actually claimed the deduction, where you were entitled to claim it. In other words, not claiming does not necessarily protect your cost base it may simply mean you forfeited the deduction and took the CGT consequence anyway.

If you are approaching a sale, a retrospective or CGT valuation and a conversation with your accountant about cost base adjustments is time well spent. This is an area where the interaction between depreciation and CGT depends heavily on individual circumstances.

How to establish your construction cost

You need a defensible figure. There are three practical routes:

1. Actual documented construction costs. If you built the property, or hold the builder's contract and variations, that is the cleanest evidence.

2. Vendor-supplied records. Occasionally a seller provides construction contracts or renovation invoices. Useful, but rarely complete.

3. A quantity surveyor's estimate. Where actual costs are unknown which is most established purchases a qualified quantity surveyor inspects the property and prepares a construction cost estimate as part of a tax depreciation schedule.

Real estate agents, valuers and accountants are generally not in a position to estimate construction costs for this purpose. Quantity surveying is the recognised discipline for it, and the schedule they produce is the document your accountant works from.

A depreciation schedule is typically prepared once and used for the life of your ownership, and the fee is generally deductible in the year it is incurred. If you are weighing up whether it is worth it, we've broken down the numbers in depreciation schedule cost in Australia.

Missed years are not always lost

If you have owned an investment property for several years and never claimed capital works deductions, amended assessments may be available for prior income years, subject to the ATO's amendment time limits. Investors are commonly able to go back two years, with longer periods available in some circumstances.

It is a conversation worth having with your accountant before you assume the deductions are gone we cover the mechanics in backdated depreciation schedules.

Frequently asked questions

What is the capital works deduction rate?

Generally 2.5% per year over 40 years for residential buildings where construction commenced on or after 16 September 1987. A 4% rate over 25 years applies to residential construction commencing between 18 July 1985 and 15 September 1987, and different rates can apply to certain non-residential buildings.

Can I claim capital works on a property built before 1987?

Generally not on the original structure. However, qualifying renovations, extensions and structural improvements completed after the relevant dates carry their own eligibility, so older properties frequently still produce a claim.

Is the capital works deduction affected by the 2017 depreciation changes?

No. The 2017 changes restricted second-hand plant and equipment deductions under Division 40. Division 43 capital works deductions on the building were not affected.

Do I need a quantity surveyor to claim capital works?

Only where actual construction costs are unavailable which covers most established property purchases. If you have documented actual costs, those can be used directly.

Can I claim capital works and repairs on the same property?

Yes, but not on the same expense. Genuine repairs and maintenance are generally deductible immediately in the year incurred, while capital improvements are written off over time under Division 43. The line between the two is a common area of confusion and worth checking with your accountant.

Does the capital works deduction apply to commercial property?

Yes. Non-residential buildings have their own rate and date thresholds, and commercial fit-outs often generate substantial claims.

What happens to the deduction when I sell?

Capital works deductions claimed generally reduce the property's CGT cost base, increasing the assessable gain on sale. The deduction is still usually worth claiming, but it should be factored into sale planning.

Where to start

If you own an investment property and have never had a depreciation schedule prepared, the first step is establishing whether one is worth commissioning. Construction date, renovation history and purchase price all feed into that, and a reputable quantity surveyor will tell you upfront if the deductions will not cover the fee.

Propti connects investors with qualified quantity surveyors and valuers across Sydney, Melbourne, Brisbane, Perth, Adelaide and major regional centres. You can read more about depreciation reports, QS reports, or browse further investor guidance in Property Insights.

This article is general information only and does not constitute tax, financial or legal advice. Depreciation and capital gains outcomes depend on individual circumstances, and rates, dates and thresholds are set by legislation that can change. Always consult a registered tax agent or accountant about your own position, and refer to the ATO for current rules.