Two investors look at the same growth suburb on the same weekend. One is weighing a house built in the late 1990s. The other is looking at a brand-new home on a similar block. Both want to know what the tax position could look like in year one, and what the rules mean in later years.
How depreciation works on each type
Tax rules split a rental into two layers for depreciation: the structure, and the removable fittings inside it (The ATO treats a rental property as two separate things for this purpose: the building itself (capital works) and the plant and equipment inside it).
For the structure, the Division 43 capital works deduction is usually 2.5% a year over 40 years for rentals built after 15 September 1987. Older homes generally have no building allowance, although renovations or capital improvements in the past 40 years may still be claimable at 2.5%.
The fittings fall under Division 40. These include ovens, carpets, blinds and air conditioners, each written down over its own effective life. Since 9 May 2017, most individual investors cannot claim second-hand plant in residential rentals. A brand-new property sits differently, because investors who buy a newly built property can still claim Division 40 on the new assets.
Where the gap actually sits
The gap is narrower than the headline suggests. Established homes keep access to the building allowance, since the building structure can still be claimed by all owners regardless of when they bought. The bigger differences are the fittings and the negative gearing rules.
From 1 July 2027, negative gearing for residential property will be limited to new builds that add to housing supply. Properties acquired before the Budget measures are treated differently. Anyone who already owned an established property before 7:30pm on 12 May 2026, including a contract signed but not yet settled, keeps the current negative gearing rules on that property until they sell it.
The status of the legislation is not settled in every summary. One commentary says those changes are now law, while another notes that the bill remains before the Senate, and key details such as the definition of 'new residential' are yet to be finalised. Confirm the current position with a licensed tax adviser before relying on either.
Capital gains tax also differs. Per the bill summary, investors in new residential properties will be able to choose either the 50% CGT discount, or cost base indexation and the minimum tax. Depreciation claims also matter at sale, because the amount claimed for Division 43 reduces the cost base of the property, potentially increasing your CGT exposure.
When it fits and when it doesn't
A new build tends to suit an investor who wants a clear tax position from the start and can manage a construction timeline. A deduction lowers taxable income rather than returning its full value, so the benefit depends on the owner's marginal rate. Depreciation is also a non-cash item, so it costs you nothing in cash each year, but the cash flow still needs to work without it.
The costs and risks to weigh include the purchase price, the construction contract terms, and the rent the property can realistically achieve. An independent rental appraisal is worth having, and vacancy should be modelled for any year, not only the first.
EWC's HomePay arrangement works differently from a standard loan. There are no payments for the first 12 months during construction. The interest for those 12 months is borrowed, meaning it is added to the loan rather than waived, and standard repayments start after that. The total owing will be higher as a result, so it should be modelled with a broker.
For super funds, the picture is narrower. From 10 August 2026, SMSFs can no longer enter into new LRBAs to acquire residential property. An SMSF can still buy residential property with fund cash, since the ban only applies to borrowing. Where borrowing is used for new residential, one structure is an unrelated unit trust that the fund invests in. Whether a trust is unrelated must be confirmed by an SMSF specialist accountant or solicitor.
Worked example
The figures below are hypothetical and illustrative only. Assume a new house where $320,000 of the cost relates to the building. At 2.5%, the building deduction is $8,000 a year, the same arithmetic shown in one capital works example where the deduction is 2.5% x $320,000 = $8,000 a year. Add a hypothetical $4,000 of Division 40 claims on new fittings in year one, for a total of $12,000.
Now take an established home built in 2004 with the same $320,000 building cost. The building deduction can still be $8,000 a year. There is no Division 40 claim on the existing carpets, blinds and appliances, so year-one depreciation is $8,000 plus any new items the owner installs.
The difference in year one is $4,000 in deductions. That is worth a fraction of that amount in tax saved, depending on the owner's marginal rate. The example leaves out interest, rent, costs and any capital gain.
What to do next
- Ask for a depreciation schedule from a quantity surveyor for any property you are considering, new or established, and compare the building and fittings figures.
- Talk through negative gearing timing, CGT options and your marginal rate with a licensed tax adviser. For super, speak with an SMSF specialist accountant or solicitor.
- Ask a licensed broker to model the loan, including how HomePay interest would be added to the balance if it applies to you.
If you would like to talk through how these pieces fit your situation, book a free call.
General information only, not personal financial advice. Speak with a licensed adviser before acting.