ATO Depreciation Rates 2025: Complete Guide for Property Investors and Business Owners

What Is Depreciation and Why Does It Matter?

Depreciation is a tax deduction that recognises the decline in value of an asset over time due to wear and tear, ageing, or obsolescence. For property investors and business owners, depreciation is one of the most valuable — and most overlooked — tax deductions available, because it is a non-cash deduction: you don't need to spend any additional money to claim it.

Many property investors significantly underclaim depreciation simply because they don't realise how much is available, or they rely solely on their accountant without commissioning a specialist depreciation report.

The Two Types of Depreciation

For investment properties specifically, depreciation falls into two distinct categories with different rules:

Building Write-Off (Division 43) Explained

If your residential property was built after 15 September 1987, you can generally claim 2.5% of the original construction cost per year for 40 years (until the full cost has been written off). This applies to the building structure itself, not the land.

What If You Don't Know the Original Construction Cost?

If you purchased an established property and don't have the original builder's costs, a quantity surveyor can estimate the historical construction cost for depreciation purposes — this is a standard part of the depreciation schedule process and is accepted by the ATO.

Plant and Equipment (Division 40)

Plant and equipment items are depreciated based on their individual "effective life" as determined by the ATO. Common rental property items and approximate effective lives include:

Effective life figures are general guides published by the ATO and reviewed periodically. A formal depreciation schedule will use current ATO figures specific to your purchase date.

Prime Cost vs Diminishing Value Method

For plant and equipment assets, you can choose between two depreciation calculation methods:

Prime Cost Method (Straight-Line)

Deducts an equal amount each year over the asset's effective life.

Annual deduction = Cost ÷ Effective life

Example: A $2,000 dishwasher with a 10-year effective life = $200 deduction per year for 10 years.

Diminishing Value Method

Deducts a higher amount in earlier years, declining over time — this generally produces a larger total deduction in the early years of ownership, which can be advantageous for cash flow.

Annual deduction = Base value × (200% ÷ effective life)

Example: The same $2,000 dishwasher would generate a deduction of $400 in year one (200% ÷ 10 years = 20% × $2,000), declining each subsequent year.

Why You Need a Quantity Surveyor's Report

A tax depreciation schedule prepared by a qualified quantity surveyor is the gold standard for maximising your depreciation claims. Here's why it matters:

• Identifies items your accountant may miss — Accountants are tax experts, not construction valuation experts. A quantity surveyor identifies and accurately values dozens of depreciable items most people overlook
• ATO-compliant valuations — Quantity surveyors are specifically recognised by the ATO (under Tax Ruling TR 97/25) as qualified to estimate construction costs for depreciation purposes
• One-off cost, multi-year benefit — A typical schedule costs $400-$900 (and is itself tax-deductible) but can unlock thousands of dollars in additional annual deductions over many years
• Covers both Division 43 and Division 40 — A comprehensive report covers the building write-off and every depreciable plant and equipment item in one document, used year after year by your accountant

Instant Asset Write-Off for Businesses

Separate from property depreciation, small businesses can benefit from the Instant Asset Write-Off, allowing immediate deduction of the full cost of eligible business assets (rather than depreciating them over several years), up to a threshold set by the government each year.

The Second-Hand Asset Depreciation Restriction

One of the most significant changes to property depreciation rules came into effect on 1 July 2017: investors who purchase a second-hand residential property can no longer claim depreciation on existing plant and equipment items that came with the property (carpets, blinds, appliances already installed by a previous owner).

What This Means in Practice

• Building write-off (Division 43) is unaffected — You can still claim this regardless of whether the property is new or second-hand, as long as construction occurred after 15 September 1987
• Plant and equipment depreciation is restricted — Only applies to items YOU purchase and install after acquiring the property (e.g., if you install a new dishwasher, you can depreciate that)
• New properties are exempt from this restriction — If you buy a brand-new property (or substantially renovated property) where you are the first owner to use the plant and equipment, you can still claim full depreciation on those items

Maximising Your Depreciation Claims — Summary

1. Commission a quantity surveyor's depreciation schedule as soon as you settle on an investment property
2. Choose the diminishing value method for plant and equipment if early cash flow support matters more to you
3. Keep records of any plant and equipment items you personally purchase and install after acquiring a second-hand property
4. Update your depreciation schedule if you make significant capital improvements (renovations, extensions)
5. Ensure your accountant applies your depreciation schedule correctly each year — provide it to them at tax time

Depreciation Is Deferred, Not Free — the CGT Consequence

Depreciation is frequently promoted as a deduction that costs you nothing because it involves no cash outlay. That framing is incomplete, and the incomplete part arrives when you sell.

Capital works deductions claimed under Division 43 generally reduce the cost base of the property. Capital gain is calculated as capital proceeds minus cost base. A lower cost base produces a larger taxable capital gain.

So a deduction claimed at your marginal rate during ownership becomes additional capital gain on sale — though if you held the property beyond twelve months, the CGT discount may apply to that gain. Whether you come out ahead depends on your marginal rate in the claiming years, your marginal rate in the year of sale, and whether the discount applies.

Plant and equipment deductions under Division 40 are dealt with differently on disposal, generally through a balancing adjustment rather than through the cost base. The interaction is not intuitive and warrants specific advice.

Repair or Improvement? The Distinction That Decides Everything

This is where most investor errors occur, because the everyday meaning of the words and the tax meaning diverge.

A repair restores something to its former condition without changing its character — replacing broken tiles with equivalent tiles, fixing a section of fence. Repairs are generally immediately deductible.

An improvement takes the item beyond its original state, or replaces it in its entirety — replacing the whole fence, replacing an old kitchen with a new one, adding a carport. Improvements are generally capital and must be depreciated or added to the cost base.

Replacing an entire asset is generally not a repair even if the replacement is like-for-like, because you have renewed the whole thing rather than restored part of it.

Timing Your Quantity Surveyor Report

A depreciation schedule can generally be prepared at any time and, where deductions were missed, prior year returns can often be amended within the standard amendment period. Obtaining the report in the first year avoids the need.

The cost of the report is itself generally deductible. Where the property is genuinely old and contains little depreciable plant, a reputable quantity surveyor will tell you whether a report is worth commissioning at all.

Depreciation rules, effective lives, and the second-hand asset restrictions change, and outcomes are highly fact-specific. This page provides general information only and is not tax advice. Speak with a registered tax agent and a qualified quantity surveyor before relying on any depreciation position.