Capital works (Division 43)
Writing off the cost of building a rental over 40 years.
Capital works deductions let you write off the cost of constructing a building, an extension or a structural improvement such as a deck or driveway, a little each year. For most residential buildings started after 15 September 1987 the rate is 2.5% of the construction cost a year, for 40 years from the day construction was completed.
The rate depends on the kind of construction and the date it started — some older buildings and short-stay traveller accommodation are 4% over 25 years — and the 40 years run from completion whoever owns it, so a buyer of an older rental claims only what is left. The cost is the construction cost from the builder’s records or a quantity surveyor’s report, never the purchase price. Claims reduce the property’s cost base for capital gains tax when you sell.
Worked example
A townhouse cost $500,000 to build, construction started in 2005, and you buy it and rent it out from 1 March 2026. The annual deduction is $500,000 × 2.5% = $12,500, and for 2025–26 you claim the 122 days it was rented: $12,500 × 122 ÷ 365 = $4,178. That is the ATO’s own worked example.
Common mistake
Using the purchase price. What you paid includes the land and the market’s view of the location; capital works is based only on what the building cost to construct, which is why a surveyor’s estimate is usually needed for a property bought second-hand.
Grounded in ATO — Work out your capital works deductions guidance. Figures last checked . General information, not tax advice.
Related terms
Depreciation (decline in value)
Claiming the cost of a big asset gradually over its life.
Rental schedule (rental property schedule)
Where each rental’s income and expenses are reported.
Initial repairs
Fixing problems that came with a rental when you bought it.
Instant asset write-off
Immediately deduct an eligible asset instead of depreciating it.
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Questions about this term
Capital works (Division 43): common questions
- Can I claim capital works on a rental I bought second-hand?
- Usually, yes. The 40 years run from the day construction was completed, whoever owned the building then, so you claim for whatever is left of that window at the rate set by when construction started. If you have no construction records, a quantity surveyor can estimate the cost, and their fee is deductible in the year you pay it.
- How is a part-year capital works claim worked out?
- By days. The annual amount — construction cost times the rate — is multiplied by the number of days in the income year the property was rented or genuinely available for rent, and divided by 365. Days you lived in it or it sat unavailable are left out, so a property rented from 1 March claims only four months of that year.
- Is capital works the same as depreciating the furniture and appliances?
- No. Capital works covers the building and structural work, written off over 40 years. Items with their own shorter life — an oven, carpet, blinds, a hot water system — are depreciating assets with their own effective lives, claimed separately, and in a residential rental bought after 9 May 2017 only new ones you bought yourself generally qualify.
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