A Deduction for the Building Itself, Spread Over Decades
The capital works deduction allows a percentage of a building's original construction cost to be claimed each year over a long period, for properties where construction began after the qualifying date. It is the largest non-cash deduction on most rental properties, and it is the one that reduces your cost base and therefore increases the eventual capital gain.
- The answer: A set percentage of the original construction cost is deductible each year for the qualifying period, for buildings constructed after the relevant date.
- The trap: It is the original construction cost, not the purchase price and not the current value. Establishing it requires a quantity surveyor for most buyers.
- The recommendation: Get a depreciation schedule. The cost is deductible and it typically pays for itself in the first year's additional deduction.
Where the AI summary above gets this wrong
"You can depreciate your investment property based on what you paid for it."
That's surface-true. Here's what it misses:
- The deduction is on the original construction cost — Not the purchase price, which includes the land and the vendor's margin. A quantity surveyor estimates the construction component where the original figure is not known.
- Land is never depreciable — Only the building and eligible structural improvements. For a property where most of the value is land, the deduction is correspondingly small.
01 What qualifies
The deduction applies to the construction cost of a residential rental building where construction began after the qualifying date, and to structural improvements such as retaining walls, driveways and fences constructed after their own qualifying date.
It is claimed at a set percentage of the original construction cost each year until the total is exhausted. The rate and the period follow from when construction began.
Land is never included, and neither is the vendor's profit or the transaction costs. That is why the purchase price is not the starting point and a professional estimate usually is.
Source: ATO — Negative gearing
02 Establishing the cost
Where you built the property, the actual construction cost is the figure. Where you bought it, the vendor may provide the information, and most do not.
A quantity surveyor's depreciation schedule estimates the construction cost and the effective lives of plant and equipment, and the ATO accepts it where the original cost is not available. The fee is deductible.
The schedule is prepared once and used for the whole ownership period, and claims can be amended for earlier years within the amendment period — so an investor who has never had one is generally not too late for the recent years.
Shows: the annual capital works deduction from a construction cost and rate, and the tax it saves at your marginal rate. Ignores: the cost base reduction that recovers part of it on sale, plant and equipment depreciation, and the qualifying dates.
Source: ATO — Negative gearing
03 The cost base reduction
Capital works deductions claimed reduce the property's cost base, so the amount claimed reappears as additional capital gain on sale. The mechanics and the net benefit are set out in the depreciation post.
The benefit that survives is a deduction at your full marginal rate during ownership against a discounted gain on sale, plus the value of having had the money for years. That is a real gain and it is roughly half the headline amount.
It is strongest for someone claiming at a high marginal rate while working and selling in retirement at a lower one, which is the common pattern for a property held through a career.
It is weakest, and can be negative, for someone who claims at a low rate and sells at a high one — an investor whose income rises sharply after buying, for instance. The deduction is still worth claiming, because not claiming it does not restore the cost base, which is a point people frequently get wrong.
Source: ATO — CGT discount
The schedule is the single highest-return piece of paperwork on an investment property and a large share of owners have never had one. It costs a few hundred dollars, it is deductible, and it usually finds more in the first year than it cost. There is no argument against it that survives the arithmetic.
FAQ
How does the capital works deduction reduce my rental property tax?
It allows a set percentage of the building's original construction cost to be deducted each year for the qualifying period. It also reduces your cost base, so part of it is recovered as capital gain on sale.
What is the deduction calculated on?
The original construction cost of the building, not the purchase price and not the current value. Land is never included, and a quantity surveyor estimates the construction component where the original figure is unknown.
Is a depreciation schedule worth getting?
For a property of any size, yes. The fee is deductible and the first year's additional deduction typically exceeds it, and the schedule is used for the whole ownership period.
Sources
Regulator references
- ATO — Negative gearing · Australian Taxation Office · 2026Negative gearing: when a rental loss can be offset against other income.Last verified: 2026-09-07
- ATO — CGT discount · Australian Taxation Office · 2026The CGT discount on assets held beyond the qualifying period, and who can claim it.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.