Two different tax deductions get lumped together as “depreciation” on an investment property, and mixing them up leads to wrong claims. This guide separates them: what each one covers, how each is worked out, and where a 2017 law change narrowed one of them sharply.

Tax outcomes depend on your circumstances — speak with a registered tax agent before acting. Nothing below is personal tax advice; it explains how the two deduction categories work in general terms.

What’s the difference between capital works and plant and equipment deductions?

They cover different parts of the same property, and different tax rules apply to each.

• Capital works deductions (Division 43 of the Income Tax Assessment Act 1997) cover the building’s structure — the bricks, concrete, roof, fixed kitchen cabinetry and similar. For most residential rental construction started on or after 16 September 1987, the deduction rate is a flat 2.5% a year over 40 years, worked out from the original construction cost and apportioned to the days the property produced income during the year. A 4%-over-25-years rate applies only to specific building categories outside standard rental construction (ATO — Work out your capital works deductions, QC 21620).
• Plant and equipment depreciation (Division 40) covers separately identifiable items with a limited effective life — ovens, carpets, air-conditioners, blinds, freestanding furniture. Rather than a fixed 2.5%, each asset’s deduction is worked out from its own effective life, to the extent it’s used to produce assessable income.

The two regimes are mutually exclusive for the same expenditure — an item is either part of the building’s capital works or a separately depreciable asset, never both.

What is a capital works deduction (Division 43)?

Capital works is the deduction for the cost of constructing the building itself, not for buying it and not for a specific removable item inside it. It’s claimed at the flat 2.5% p.a. rate described above, for up to 40 years from when construction was completed, and only for the portion of the year the property was rented or genuinely available to rent.

Because it’s tied to the original construction cost, not the purchase price, an investor buying an established property generally needs to work out what the building actually cost to construct — the facts behind that figure aren’t something this article estimates, and a registered tax agent (or a quantity surveyor engaged through one) is the right path to a specific number for a specific property.

What is plant and equipment depreciation (Division 40)?

Division 40 depreciation applies to depreciating assets — items with their own, shorter effective life than the building around them. The deduction is worked out asset-by-asset, based on how long each one is expected to last, and only for the portion of its use that produces assessable income.

This is where the rules diverge sharply from capital works, because of a change made in 2017.

The second-hand plant and equipment restriction

For income years starting on or after 1 July 2017 (applying to assets acquired at or after 7:30pm AEST on 9 May 2017), a specific rule — section 40-27 of the Income Tax Assessment Act 1997, inserted by the Treasury Laws Amendment (Housing Tax Integrity) Act 2017 — further reduces the Division 40 deduction, in practice usually to nil, for a residential landlord who:

• did not hold the asset when it was first used or installed ready for use by any owner (in other words, it’s second-hand), or
• has, at some point, used the asset in one of their own residences, or used it more than occasionally for a purpose that wasn’t taxable.

In plain terms: if you buy an established rental property, you generally can’t claim ongoing Division 40 depreciation on the second-hand oven, carpet or air-conditioner that came with it. Capital works deductions on the building itself are not affected by this restriction — a buyer of an established property can still claim any remaining Division 43 deductions on the structure, because that’s a different regime entirely.

There are some exceptions written into the law:

• Excluded entities — corporate tax entities, super funds that aren’t SMSFs, managed investment trusts, public unit trusts, and certain unit trusts/partnerships made up entirely of those entities. Note the wording carefully: an SMSF is not on this excluded list — a self-managed super fund holding a residential property is still caught by the second-hand restriction on its plant and equipment.
• Genuinely new residential premises, where nobody has previously lived in the dwelling and no earlier owner could have depreciated the asset, subject to further conditions including a limited grace window for brief occupation before sale.
• Assets allocated to a low-value pool.

None of this affects a first original owner buying new — the restriction is specifically aimed at the second (or later) owner of already-used assets.

How do these deductions interact with negative gearing?

Both deduction categories are non-cash — they reduce your taxable rental result without you writing a cheque that year — so they can be part of what pushes a property’s deductible expenses above its rental income. Negative gearing is the ATO’s own term for that situation: it “occurs when you buy a rental property with the assistance of borrowed funds and the rental income is less than the deductible expenses (including interest on the borrowings)” (ATO, Rental properties guide). The resulting net rental loss is what “negative gearing” refers to.

Two different points in time matter here, and it’s worth keeping them separate:

• Current law (as at July 2026, the 2026-27 income year): a net rental loss — including one built up through capital works and plant and equipment deductions — can generally be offset against your other income (salary, wages, business income) in the same return, or carried forward if your other income isn’t enough to absorb it. There’s no general dollar cap on this under current law.
• An enacted change from the 2027-28 income year: under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (assented 26 June 2026), residential rental deductions exceeding residential rental income will be quarantined — no longer offsettable against other income such as salary. The quarantined amount will instead be usable against residential capital gains or carried forward against future residential rental income. Interests acquired before 7:30pm AEST 12 May 2026 are grandfathered under the current rules. What counts as a “new residential dwelling” exemption from this quarantine is not yet settled in a registered instrument, so this article doesn’t attempt to define that boundary.

These are two genuinely different regimes at two different dates — current-law offsetting now, quarantining from 1 July 2027 — and neither changes the underlying capital works/plant and equipment distinction above; they change what you can do with the loss those deductions help create.

Capital works and plant and equipment, side by side

	Capital works (Division 43)	Plant and equipment (Division 40)
What it covers	The building structure itself — walls, roof, fixed cabinetry	Separately identifiable items with their own effective life — ovens, carpets, air-conditioners, furniture
Rate/basis	Flat 2.5% p.a. of construction cost, for up to 40 years (construction from 16 Sep 1987); a narrower 4%/25-year rate applies to specific categories	Worked out per asset from its own effective life
Buying an established (second-hand) property	Any remaining years of the 40-year period can still generally be claimed	Second-hand assets are, from the 2017-18 income year (1 Jul 2017), further restricted under s40-27 — usually to nil, subject to the exceptions above
SMSF ownership	Not affected by the s40-27 exclusion list	An SMSF is not an excluded entity — still caught by the second-hand restriction

Where to get exact figures for a specific property

This article explains how the two categories work in general; it doesn’t estimate a dollar figure for any property, because construction cost and each asset’s effective life are property-specific facts this file doesn’t hold. A registered tax agent is the right starting point for working out what applies to a given property and ownership structure — tax outcomes depend on your circumstances — speak with a registered tax agent before acting.

If you’re weighing up how ongoing deductions and rental cash flow fit together before committing to a whole property, our guide to cash flow positive vs negatively geared property covers that trade-off directly. And if you’re still working out the basics of what property investing involves before any of this, our guide to property investment in Australia is the place to start.

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General information only. This article provides general information and does not take into account your objectives, financial situation or needs. It is not financial product advice, tax advice or legal advice. Consider whether the information is appropriate for your circumstances and seek advice from a licensed professional before making financial decisions. MyBrix Pty Ltd ABN 37 669 479 636 is authorised representative 1304961 of Australian Financial Licensing Group, AFS Licence No. 269868. Brix are issued by MyBrix Properties Pty Ltd ACN 669 491 338. Before acquiring or selling Brix, read the Product Disclosure Statement and Target Market Determination available at mybrix.com.au.