Depreciation on established houses

Two kinds of deduction

The tax law splits a rental property into two parts.

• Capital works (Division 43): the building itself. Walls, roof, floors, built-in kitchens and bathrooms, and later structural improvements.
• Plant and equipment (Division 40): items that wear out faster and can be removed. Ovens, dishwashers, hot water systems, carpets, blinds, air conditioners.

Land is never depreciable. Neither is what you paid for the house: deductions are based on what it cost to build, not what you paid to buy it.

Capital works: the part that still counts

For residential buildings where construction started after 15 September 1987, the ATO allows a deduction of 2.5% of the original construction cost each year, for 40 years from when construction finished. Buildings started between 18 July 1985 and 15 September 1987 get 4% a year over 25 years. Older buildings generally get nothing for the original structure, but later renovations by any owner can still qualify.

You inherit whatever is left of the 40 years. A house finished in 2005 has deductions available until 2045. A house finished in 1985 has none on the original build, but a 2010 kitchen and bathroom renovation might.

Here's an illustrative example, not a forecast. Assume a house finished in 2005 with an estimated construction cost of $220,000. The deduction is 2.5% of that, or $5,500 a year, until 2045. If the same house had a $40,000 renovation in 2015, that adds $1,000 a year until 2055.

One catch: capital works deductions you claim reduce your cost base when you sell, so they generally increase the capital gain later. The deduction is a timing benefit, not free money.

Plant and equipment: the 2017 change

This is where established houses lost most of their depreciation. For residential rentals bought after 7:30pm AEST on 9 May 2017, you generally can't claim depreciation on second-hand plant and equipment that was already in the house. The previous owner's oven, carpet and air conditioner are out.

There are exceptions (for example, if you carry on a business of letting properties, or the owner is an excluded entity such as a company), so check with your accountant.

What you can claim is anything you buy new for the rental. Replace the hot water system, put in new carpet or a split system, and those items are depreciable over their effective life. That's a reason to keep receipts and tell your accountant what you replaced each year.

Quantity surveyor reports

Most investors don't know the original construction cost of a 20-year-old house. The ATO allows you to use an estimate from a quantity surveyor or other independent qualified person when the actual cost can't be determined, and the fee for the report is deductible in the year you pay it.

A report is usually worth getting when the house was built after 1987, or has had significant renovations. For an older, untouched house, ask the surveyor before you pay whether a report is likely to find enough to justify the cost. A reputable one will tell you.

If you're buying, ask the seller's side whether a capital works notice or previous depreciation schedule exists. It can save time.

How the 2026 rules change the value of a deduction

Depreciation still reduces your rental result (rent minus interest, running costs and deductions). What's changed is where a loss can go.

For established residential property acquired after 7:30pm AEST on 12 May 2026, from 1 July 2027 rental losses can only be offset against residential property income and gains, with unused losses carried forward. From 1 July 2027 the 50% CGT discount is replaced by an inflation-indexed cost base, with a 30% minimum tax rate for resident individuals (the gain taxed as the last slice of income). Assets held before 1 July 2027 are treated as sold and reacquired on that date, keeping the old discount on the gain to that date. Qualifying new builds can choose either treatment. Properties owned before 12 May 2026 keep the old loss treatment. Your accountant can tell you how it applies to you.

In plain terms, for an established house bought now:

• If the property is cash flow positive before depreciation, depreciation reduces tax on that rental profit, much as before.
• If it's already making a loss, depreciation makes the loss bigger, and that loss is carried forward rather than reducing tax on your salary. It may still be useful against future rental profits or gains, just later.

So depreciation shouldn't be the reason you buy a property, and it shouldn't be what makes the holding cost work. Run the weekly holding cost before tax in our calculators, then treat any deduction as a bonus your accountant can quantify. The 2026 tax changes guide covers the wider rules.

Sources

• Australian Taxation Office, "Work out your capital works deductions", updated June 2026
• Australian Taxation Office, "Second-hand depreciating assets", updated June 2026
• Australian Taxation Office, "Cost base adjustments for capital works", updated June 2026

General information only. Nothing on this site takes into account your objectives, financial situation or needs, and it is not financial, credit, tax or legal advice. Past performance is not a reliable guide to future performance.