Depreciation deductions, an investment property and capital gains tax

Depreciation Deductions

Claiming tax depreciation deductions against an investment property can put thousands of dollars back in your pocket each year.  But will claiming deductions now mean paying more capital gains tax when you sell?


What is capital gains tax (CGT)?

CGT is the tax payable on the “capital gain” made while you hold an investment property.  The “capital gain” is the difference between what you bought the investment property for and what you sell it for.

For example, if you bought an investment property for $400,000 and sold it a few years later for $600,000 then CGT is payable on the $200,000 “capital gain” you made.  CGT is calculated at your personal marginal tax rate for the financial year in which you sell the property.

As an owner/occupier you generally won’t pay CGT as long as the property remains your principal place of residence.  Individuals and small business investors who hold an investment property for more than 12 months receive a 50% exemption on CGT.

Tax deductions are claimable for the wear and tear of capital works (the actual building) and plant and equipment (fixtures and fittings) of an investment property.

You can claim tax depreciation deductions by having a Quantity Surveyor complete a tax depreciation schedule – a detailed list of all items that can be depreciated, and how much each item will depreciate each year for the next 40 years.  Your accountant can use this tax depreciation schedule to significantly reduce your tax bill, especially during the early years of your property investment.


Will claiming tax depreciation deductions increase the CGT payable?

Probably.  Claiming depreciation deductions for your property’s capital works will reduce the “base” or original value of your investment property.  This effectively widens the gap between what you bought it for and what you can sell it for and increases the “capital gain” on which CGT is based.

CGT may be payable on plant & equipment assets within your investment property, but only if their value at sale time is higher than their value at purchase.


Is it worth claiming the depreciation deductions then?

YES!  Either way you will pay tax against your property’s capital gain at your marginal tax rate.  By claiming depreciation deductions each year, you are freeing up cash that can be used to reduce debt or to pursue other investment opportunities – both great ways to increase wealth!