By Varun Agarwal, co-founder of PropRetire · Published 8 Nov 2026 · Law as read 8 Nov 2026 · 2 min read

How are capital works deductions worked out on a rental?

For a rental home whose building began from 16 September 1987, the capital works deduction is generally 2.5% a year of what it cost to build, for 40 years. It runs from when building finished, not from when you bought.

An older building had 4% over 25 years, which has now run out, or none.

It turns on when construction began. A home built for people to live in qualifies only if it began after 17 July 1985.

Begun from 18 July 1985 to 15 September 1987, it is 4% a year over 25 years. Begun from 16 September 1987, it is 2.5% a year over 40 years, or 4% for some work under contracts made before that day.

It is sections 43-15, 43-25, 43-90 and 43-220 of the Income Tax Assessment Act 1997, and the ATO sets out each date in Work out your capital works deductions.

On what the building cost to build, not the price you paid. The land is not part of it, and the ATO says general landscaping may not be either.

Without a record of the cost, the ATO says to get it from the previous owner or a qualified person, such as a quantity surveyor. The fee for that report is claimed in the year it is paid.

The claim can start only once construction is finished. A home finished in November 2005 has 40 years at 2.5% to November 2045, so a buyer in 2026 claims what is left of them.

Only the days the property is used to earn income count. Days it is lived in or used privately are left out.

In the ATO's example, Meg buys a rental townhouse on 1 March 2026 for $700,000 and rents it out at once. It was begun in February 2005 and finished in November 2005, and a quantity surveyor estimated it cost $500,000 to build.

$500,000 at 2.5% is $12,500 a year. She rented it for 122 days of 2025-26, so that year's claim is $12,500 times 122 over 365, which is $4,178.

In the ATO's 2023-24 figures, landlords living in postcode 2000 claimed $5,000 of capital works each on average, against $2,000 across Australia.

Yes. An extension, a new deck or a renovation is its own construction, claimed at the rate for when that work began, from when it was finished.

Replacing a whole structure, such as a whole fence, is capital works too. Fixing part of something worn or broken while the home is rented is a repair, claimed in the year you incur it.

For a home bought after 13 May 1997, the capital works claimed or claimable come off the cost base, so the same price leaves a bigger gain. Does depreciation increase capital gains tax on a rental works it through.

The type of building and who built it, the date building began and finished, what it cost or a qualified person's estimate, the date you bought, and the days the home was rented each year.

The rental property tax calculator works the tax a rental adds or saves from its rent and deductions.