2.5% / 4% 40 year write-off
Capital Works Deductions — Rental Property
The deduction for the building itself: a fixed percentage of the construction cost, every year, for 40 years. This page has the full rate table, the date rules, and the two things that most often go wrong.
Which rate applies to you
Two things decide it: the type of construction and the date construction started. Not the settlement date, not the price you paid.
| Type of construction | Rate a year | Claimed over |
|---|---|---|
| Residential building — construction started 16 September 1987 or later | 2.5% | 40 years |
| Residential building — construction started 18 July 1985 to 15 September 1987 | 4% | 25 years |
| Structural improvement — started 27 February 1992 or later | 2.5% | 40 years |
| Non-residential building (shop or office) — started 16 September 1987 or later | 2.5% | 40 years |
| Short-term accommodation (hotel, motel, units or flats) — started 27 February 1992 or later | 4% | 25 years |
| Construction started before 18 July 1985 (other than the cases above) | Not eligible | — |
The older date bands matter if you own an older building. A residential building started between 18 July 1985 and 15 September 1987 gets 4% over 25 years instead of 2.5% over 40 — a faster write-off on the same cost.
The formula
construction cost × rate × (days used to produce income ÷ 365)
The ATO’s worked example: $500,000 × 2.5% = $12,500 a year. Rented for 122 days, the first-year claim is $12,500 × (122 ÷ 365) = $4,178.
What the deduction looks like on different construction costs
At the 2.5% rate, for a full year of rental use:
| Construction cost | Yearly deduction | Per fortnight | Total over 40 years |
|---|---|---|---|
| $300,000 | $7,500.00 | $288.46 | $300,000 |
| $500,000 | $12,500.00 | $480.77 | $500,000 |
| $800,000 | $20,000.00 | $769.23 | $800,000 |
Deductions can never exceed the construction expenditure itself — the 40 years is simply how the cost is spread.
The two things that go wrong
1. Using the purchase price
You cannot use the price of the building and land, the insured value or the replacement cost. If you do not have the receipts, you need a written estimate from an appropriately qualified person:
- a quantity surveyor
- a clerk of works, such as a project organiser on major building projects
- a supervising architect who approved payments at project stages
- a builder experienced in estimating construction costs of similar projects
The fee for that report is itself deductible.
2. Forgetting the CGT cost base
Capital works expenditure forms part of the cost base of your property for capital gains tax. Every deduction you claim reduces that cost base, so a bigger capital gain when you sell.
It is still usually worth claiming — the deduction comes at your marginal rate now, and the CGT adjustment may come at a discounted rate much later — but it is not free money, and it is the one thing investors are most often surprised by at sale time.
Frequently asked questions
What is a capital works deduction?
A tax deduction for the construction cost of a building and structural improvements used to produce income, spread over 40 years at 2.5% (or 25 years at 4%). It applies to the structure — the walls, floors, roof, plumbing and built-in fittings — not to the loose items inside.
How long do I get the deduction for?
40 years from the date construction was completed at the 2.5% rate, or 25 years at 4%. The 40 year clock does not restart when you buy the property — a 20 year old building has 20 years left, not 40.
Can I use the price I paid for the property?
No. The ATO specifically rules out the purchase price of the building and land, the insured cost and the replacement cost. You need receipts, or a written estimate from a quantity surveyor, clerk of works, supervising architect or an experienced builder.
What if I never rented it out for part of the year?
You only claim for the days the property was used to produce income. The claim is the annual deduction × (days ÷ 365). Personal use, vacant periods and your own holidays do not count.
Does it affect CGT?
Yes — and this is the part people forget. Capital works expenditure forms part of the cost base of the property for CGT purposes, and the deductions you claimed reduce that cost base. When you sell, you take the claimed deductions into account in working out your capital gain.
What can’t I claim?
General landscaping is the usual example — the ATO notes that although you may be able to claim capital works deductions for building costs, the same is not true of certain costs such as general landscaping. Works also have to be complete before the deduction starts.
I am an owner builder — does that matter?
Your own labour and expertise is not part of the construction cost, and neither is any notional profit margin you might have added. Only the actual cost of the works counts.
Next
- Property depreciation calculator — capital works and plant, together
- Diminishing value vs prime cost — for the assets inside the property
Rate table, formula and worked example from the Australian Taxation Office, checked 12 October 2026.