Can I claim depreciation on a second-hand townhouse?

The capital works deduction can still apply if construction began on or after 16 September 1987 and the property earns income. For plant and equipment, the ATO says most second-hand items in an established residential rental cannot be claimed after 1 July 2017. A tax agent can check which items qualify.

Does the purchase price set the capital works deduction?

No. The ATO bases it on the construction cost, supported by records or a qualified estimate. The claim period is 40 years from the date construction was completed, which is why a buyer of a second-hand property can still have years left to claim.

Is the depreciation schedule fee deductible?

Per the ATO, a deduction can be claimed for the fees paid to obtain an estimate of construction costs, and quantity surveyor reports can also include a schedule of depreciable assets. The ATO's depreciating assets page notes that a quantity surveyor can prepare a report when a rental property is purchased. How the fee for a combined report is treated is worth confirming with a tax agent. Whether a schedule produces enough deductions to be worthwhile depends on the property, its age and the owner's situation, so a tax agent can advise.

Does depreciation apply to a townhouse I live in?

The ATO's rules apply to property used to earn income. Periods of personal use are excluded from the capital works claim, and deductions for plant and equipment apply only for the time the assets are used to earn income. A townhouse that is the owner's home all year therefore produces no claim, though part-year or part-property rental use can be apportioned.

Is a townhouse built off the plan treated differently?

The ATO says capital works deductions can start only when construction is completed, so no claim is possible while the townhouse is still being built. Once it is complete, the 40-year claim period for a 2.5% building runs from the completion date. The off-the-plan contract guide covers what the contract should say.

How does tax depreciation work on an investment townhouse?

The ATO recognises two kinds of deduction for the wear of an investment townhouse: capital works deductions for the building itself, and decline-in-value deductions for removable items such as appliances and carpets. For residential buildings where construction started on or after 16 September 1987, the capital works rate is 2.5% of the construction cost a year for 40 years. Since 1 July 2017, most second-hand items in an established rental cannot be claimed. The ATO pages used here were last updated between May and June 2026.

The capital works deduction is based on what the building cost to construct, not on the price paid for the townhouse. The ATO also says it can only be claimed once construction is complete and while the property is used to earn income.

Checked October 2026. Rules, rates and prices change, so confirm anything that matters with the source linked below.

Capital works: the building and fixed structures

The ATO's rates for buildings intended for residential or income-producing use are:

Construction started	Deduction rate	Years
18 July 1985 to 15 September 1987	4%	25
16 September 1987 onwards	2.5% (4% for certain contracts made before 16 September 1987)	40

For separate structural improvements, the ATO table gives 2.5% where construction began from 27 February 1992. The residential row of the table starts at 18 July 1985, so older buildings need checking with a tax professional or the ATO. The table also has different rates for short-term accommodation buildings such as apartment complexes of 10 or more units.

Annual deduction = construction cost x rate x (days used to earn income / 365).

Worked example (illustrative figures): a townhouse cost $380,000 to build. The full-year deduction is 380,000 x 0.025 = $9,500. If it is rented for 122 days in the first year, the claim is 9,500 x 122 / 365 = $3,175 (rounded). The purchase price does not enter the calculation.

To claim, the ATO says you need the type of construction, the dates construction began and finished, the construction cost, who carried out the work and the period it was used for income. If the original records are missing, a quantity surveyor, clerk of works, supervising architect or a builder experienced in estimating similar projects can provide the estimate. A seller who was able to claim a deduction for capital works begun after 26 February 1992 should give the buyer a capital works notice within six months following the income year in which they sold.

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Plant and equipment: the removable items

Items such as appliances, floating floors, carpets, curtains, furniture and air conditioners are depreciating assets. The ATO's treatment:

Costing $300 or less: an immediate deduction in the year the asset is used for income, unless it is part of a set of assets that together cost more than $300.
Over $300: claimed over the asset's effective life, using either the diminishing value or prime cost method, with the owner's choice of the Commissioner's effective life or their own reasonable estimate.
Under $1,000: can be grouped into a low-value pool.

The key dates are 9 May 2017 and 1 July 2017. The ATO says that in most cases you cannot claim for second-hand depreciating assets in a residential rental after 1 July 2017, such as the dishwasher or carpet already in an established townhouse. The main exceptions are assets bought before 7:30pm AEST on 9 May 2017 and installed in the rental before 1 July 2017, an owner carrying on a business of letting rentals, and some company and fund owners.

New assets can be claimed if nobody was previously entitled to a deduction and either nobody lived at the property before the owner acquired it or the owner acquired the property within six months of it being newly built or substantially renovated. A buyer of a new, never-occupied townhouse is the typical case that meets the first test. A buyer of an established property that has had occupants generally does not, so the second-hand restriction applies to the items already in it.

What a depreciation schedule is

A depreciation schedule is a report listing the capital works and each depreciating asset with its cost and the amount to claim each year. The ATO says quantity surveyor reports can include a schedule of depreciable assets, and that the fees paid to obtain the estimate of construction costs are deductible. The schedule is a record that supports the claim in the tax return. Who prepares it is for each owner to decide, and a registered tax agent can say how it would be used.

Strata levies, special levies and defects

Regular body corporate levies for administration or a general sinking fund are deductible when incurred. A special levy for a particular capital improvement is not an immediate deduction, but the ATO says it may be claimable as capital works once the work is completed. The strata fees tax guide covers the levies in more detail.

How depreciation connects to the 2026 tax changes

Depreciation is a deduction that does not involve a cash payment, so it can increase a rental loss. From 1 July 2027 the Budget explainer says losses on established residential properties bought after 7:30pm AEST on 12 May 2026 can only be deducted against other residential property income, with the excess carried forward. New builds can still be negatively geared. Capital works deductions claimed also need to be taken into account when working out a capital gain or loss on sale, and the 50% discount is being replaced by indexation and a 30% minimum tax for gains accruing after 1 July 2027. See are townhouses a good investment for the overview and the yield and costs guide for how deductions relate to cash flow.

Common questions

Can I claim depreciation on a second-hand townhouse?: The capital works deduction can still apply if construction began on or after 16 September 1987 and the property earns income. For plant and equipment, the ATO says most second-hand items in an established residential rental cannot be claimed after 1 July 2017. A tax agent can check which items qualify.
Does the purchase price set the capital works deduction?: No. The ATO bases it on the construction cost, supported by records or a qualified estimate. The claim period is 40 years from the date construction was completed, which is why a buyer of a second-hand property can still have years left to claim.
Is the depreciation schedule fee deductible?: Per the ATO, a deduction can be claimed for the fees paid to obtain an estimate of construction costs, and quantity surveyor reports can also include a schedule of depreciable assets. The ATO's depreciating assets page notes that a quantity surveyor can prepare a report when a rental property is purchased. How the fee for a combined report is treated is worth confirming with a tax agent. Whether a schedule produces enough deductions to be worthwhile depends on the property, its age and the owner's situation, so a tax agent can advise.
Does depreciation apply to a townhouse I live in?: The ATO's rules apply to property used to earn income. Periods of personal use are excluded from the capital works claim, and deductions for plant and equipment apply only for the time the assets are used to earn income. A townhouse that is the owner's home all year therefore produces no claim, though part-year or part-property rental use can be apportioned.
Is a townhouse built off the plan treated differently?: The ATO says capital works deductions can start only when construction is completed, so no claim is possible while the townhouse is still being built. Once it is complete, the 40-year claim period for a 2.5% building runs from the completion date. The off-the-plan contract guide covers what the contract should say.

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Sources

This is general information, not financial, tax or legal advice. Get advice that suits your situation before you buy.