New-Build Depreciation: Why a Tax Deduction Is Not Money in Your Pocket

TL;DR: Eligible residential construction may attract capital works deductions, generally at 2.5% a year for up to 40 years when construction began after 15 September 1987, and some new plant and equipment may also qualify. A deduction reduces taxable income, so it is not cash equal to the deduction: in an illustration, a $15,500 deduction at a 32% marginal rate is worth about $4,960 in tax reduction, if it is currently usable. The negative gearing changes that start on 1 July 2027 are law, but the definition of a qualifying new dwelling sits in a bill that was still before the Senate as at 11 November 2026.

Is depreciation money in your pocket?

Not dollar for dollar. A deduction reduces taxable income. The cash benefit is the tax you save, which depends on your marginal tax rate and whether the deduction can be used in that year. Depreciation is not a bill you pay each year; it is a tax deduction for qualifying construction costs or depreciating assets used to produce income.

For 2026-27, a resident individual with $120,000 of taxable income is in the 30% marginal income tax bracket. Adding the standard 2% Medicare levy gives a simple 32% illustration. It excludes individual adjustments such as Medicare levy exemptions or surcharge, offsets, study loan repayments and other tax interactions.

The two types of rental property deductions

Capital works (Division 43). Capital works can cover eligible building construction and structural improvements. For qualifying residential construction that began after 15 September 1987, the deduction is generally 2.5% of eligible construction expenditure each year for up to 40 years from completion. The deduction is based on eligible construction expenditure, not the property purchase price, and can generally be claimed only while the property is used or genuinely available to produce assessable income. The 40-year period follows the original construction; buying the property does not reset it.

Depreciating assets (Division 40). Separate assets such as eligible appliances, carpets and blinds may be depreciated over their effective lives. The claim depends on the asset, its use, the purchase and installation history, and the applicable tax rules. An immediate deduction for an asset costing $300 or less is available only when all the relevant tests are met. These include that it is mainly used to produce assessable income that is not business income, and that it is not part of a set or one of a number of substantially identical assets acquired in the year that together cost more than $300.

Capital works deductions claimed, or that you were entitled to claim, generally reduce the CGT cost base when the property is sold. A tax agent can check the amount and any applicable exception.

Why new builds can have different depreciation claims

Since the 2017 rule change, most individual investors cannot claim a decline-in-value deduction for second-hand depreciating assets in a residential rental property acquired at or after 7:30pm AEST on 9 May 2017. Limited exceptions apply, including in some circumstances where an investor carries on a business of letting rental properties or is an excluded entity. Whether an investor is carrying on a business is a fact-specific legal test; having multiple rooms or tenants does not automatically establish a rental business.

New depreciating assets may qualify where the ATO requirements are met, including that no one was previously entitled to a deduction for the asset. Acquisition timing and prior use can matter. Substantial renovations also have a specific meaning: all or substantially all of a building must be removed or replaced. Neither a new property label nor a rooming house or Co-living configuration makes every asset automatically deductible. Confirm the claim item by item with a registered tax agent.

A worked example: deduction versus tax saving

The following illustration carries forward figures from AIP's separate “New vs Established Investment Property in 2026” comparison. The $15,500 and $5,000 deduction assumptions have not been independently verified in this article as representative amounts or as a like-for-like comparison. Actual claims depend on the property, construction expenditure, assets, ownership, use and tax position.

At this illustrative rate, $15,500 multiplied by 32% is $4,960. The $10,500 difference in assumed deductions is worth about $3,360 in tax reduction, not $10,500. This calculation assumes the deduction is eligible and usable against income taxed at 32%. If deductions exceed the income they can currently offset, the timing and availability of any benefit may differ.

Depreciation schedules and tax timing

A quantity surveyor or other appropriately qualified professional may estimate construction costs if actual costs cannot genuinely be determined. The ATO says the fee for an appropriately qualified construction-cost estimate can be deductible as a tax-related expense in the year it is incurred. A depreciation schedule is not automatically required in every case; the records and basis for each claim must still be adequate.

If eligible deductions are expected to reduce your tax for the year, an employee may be able to apply to vary PAYG withholding so less tax is withheld during the year. That changes the timing of withholding, not the final tax liability. Get advice before varying withholding, as an incorrect estimate can leave tax payable at assessment.

How the 1 July 2027 changes fit in

The first tranche of negative gearing reforms is law and applies from 1 July 2027. For established residential property acquired on or after 7:30pm AEST on 12 May 2026, net rental losses are generally to be ring-fenced from non-residential income such as wages. Those losses can generally be carried forward and used against eligible residential property income and gains. Properties held before the announcement are grandfathered under the legislation.

Qualifying new residential dwellings are excluded from the ring-fencing, but the detailed definition is not yet law. It sits in the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026, which was introduced on 14 October 2026, passed the House of Representatives on 29 October 2026 and then went to the Senate. The Senate Economics Legislation Committee held hearings on 5 and 6 November 2026 and was due to report on 13 November 2026.

Treasury's summary of the draft is that a property will generally be considered new where it genuinely adds to housing supply, provided it was acquired within 24 months of a certificate of occupancy being issued, extended from the 12 months set out in the Budget. The draft materials set out more than one route to qualifying, so the 24-month window is one path rather than a condition on every property. The routes include construction on land with no existing residential dwelling, development that increases the number of dwellings on a parcel, conversion of a non-residential building into dwellings, and acquisition inside that 24-month window from a vendor for whom the dwelling was new. Replacing one dwelling with one dwelling does not generally qualify, while a development that increases the dwelling count can.

Because the definition is not settled, do not assume that a particular AIP property, duplex or house and land package qualifies based on its marketing label. Check the final law and obtain tax advice before relying on the exception.

This change concerns when a rental loss can offset other income. It does not turn a depreciation deduction into cash, and its effect depends on each investor's complete tax position.

Outlook

The next milestone is the Senate. If the Tax Reform No. 3 Bill passes in the final 2026 sittings, investors will have a settled definition of a qualifying new dwelling well before the 1 July 2027 start date, and the occupancy certificate date becomes a document worth checking on every contract. If it does not pass, the detail may move again. Treasury has also said that further tranches of legislation will follow, so some administrative and reporting rules are still to come.

The practical step is to separate the two questions. Assess a property on rent, costs, location and purchase price first, then model the tax effect at your own marginal rate rather than at the headline deduction. You can compare property types, prices and locations using our advanced search before you take a specific property to your registered tax agent.

Conclusion

New builds may provide access to capital works deductions and eligible new plant and equipment deductions, while most individual investors cannot claim the second-hand fittings already in an established residential rental property. But a deduction is not cash. Estimate the tax effect at your marginal rate, check whether the deduction is available now, and assess the property on rent, costs, location and purchase price first.

Key Takeaways

• Capital works: qualifying residential construction that began after 15 September 1987 is generally deductible at 2.5% a year for up to 40 years.
• Plant and equipment: claims depend on prior use, asset type and the specific ATO rules; limited exceptions apply to second-hand assets.
• Deductions are not cash: at a simple 32% marginal rate, a $15,500 deduction is worth about $4,960 if currently usable.
• Check the tax settings: the 1 July 2027 negative gearing changes are law, while the definition of a qualifying new dwelling was still before the Senate as at 11 November 2026.
• Get an individual assessment: a registered tax agent can review eligibility, records and how any losses can be used.

Visit ausinvestmentproperties.com.au to view all our available investment properties and use our advanced search filters to find high-growth, low-vacancy locations that match your budget.

Frequently Asked Questions

Is depreciation cash income?
No. Depreciation is a deduction from taxable income. Its tax value depends on the investor's tax position and whether the deduction can be used in that year.

How much can I claim for capital works?
Qualifying residential construction that began after 15 September 1987 can generally be claimed at 2.5% a year for up to 40 years, subject to eligibility and income-producing use.

Can I claim depreciation on an established rental property?
Most individual investors cannot claim decline in value for second-hand plant and equipment in a residential rental property acquired at or after 7:30pm AEST on 9 May 2017. Limited exceptions apply. Capital works deductions may still be available.

What does a $15,500 deduction save at a 32% marginal rate?
About $4,960, if the deduction is eligible and can be used against income at that rate. It is not a $15,500 cash payment or tax refund.

What changes from 1 July 2027?
Net rental losses on established residential property acquired on or after 7:30pm AEST on 12 May 2026 are generally ring-fenced from wages. The definition of a qualifying new dwelling sits in the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026, which passed the House of Representatives on 29 October 2026 and was still before the Senate as at 11 November 2026, so it should be checked before purchase.

Sources: ATO: Work out your capital works deductions; ATO: Guide to depreciating assets 2026; ATO: Tax rates, Australian residents; ATO: Rental properties guide 2026; Treasury: Budget 2026-27 tax system changes; Parliament of Australia: Tax Reform No. 3 Bill 2026; Treasury: Tax reform consultation, August 2026; ATO: PAYG withholding variation

Disclaimer: This article is general information only and is not tax, financial, legal or investment advice. Figures and legislative status are stated as at 11 November 2026. Speak with a registered tax agent about your circumstances before relying on any deduction.