Does Claiming Depreciation Affect Capital Gains Tax?

By February 19, 2019 No Comments

You’ve decided to become an investor, you’ve purchased your first property and its tax time.  Your accountant asks the following question.  Would you like to claim depreciation year on year?  Do you know which direction to take? What’s your answer?

Claiming depreciation can offer significant tax benefits to property investors but claiming depreciation will also affect the capital gains tax payable.

So, if you’re claiming depreciation on your property, what you really need to know when it comes time to sell your property is, how does the depreciation claimed affect the capital gains tax that you’re going to pay? Does it increase the capital gains tax or does it decrease the capital gains tax?

Capital gains tax is simply a tax you pay on the profit or gain made from owning a property.  Capital gains is the amount equal to your capital proceeds minus the cost base of the property.

  • Capital proceeds is the sale price of your property minus the expenses of selling that property such as agents fees and marketing costs.
  • Cost base is the cost of buying the property plus the expenses that come with buying that such as legal fees and in some cases may even include Stamp Duty.
  • Capital Gain = (Capital proceeds – Cost base)
  • Depreciation = is the value change or effect on an asset as it ages.

You would probably recognise depreciation as a term more often associated with motor vehicles.  When applied to property, Depreciation takes two forms – Capital works (Div 43) and Plant/Equipment (Div 40).  In essence, Capital works is what the dwelling is constructed from and Plant/Equipment is what’s in or attached to the dwelling. It should also be noted here that the difference between the two is that Div 40 Plant /Equipment items will depreciate faster.

Essentially depreciation in both forms lowers your cost base. Claiming depreciation is simply saying these items are no longer worth what I paid for them. The result is a lowering of the cost base.

NOTE: The only time this alters is when you renovate and replace items of lower value with items of higher value. A good example is a kitchen or bathroom renovation.

At Launch Properties we always recommend you purchase a depreciation report from a qualified firm.  This once off cost is tax deductible and will last for the duration of your ownership of the property. It will detail each and every item of material used for construction and all the deductible plant and equipment items.

So, if claiming depreciation lowers your cost base it will therefore increase the gap between the cost base and the sale price, capital proceeds and therefore the tax payable. So why do it?

Let me start by saying that claiming depreciation annually is a choice, you can elect to not claim depreciation, keeping your cost base high and reducing the Capital gain and therefore the tax payable.

At Launch Properties we work with investors who have chosen to activate their prosperity utilising property as a vehicle for wealth creation, so why do we recommend claiming depreciation?

Firstly, claiming depreciation on an annual basis improves an investors cash flow and decreases the personal investors tax payable.  A smart investor, will use that cash benefit to pay down debt, save on interest via an offset account or to re-invest in an additional property or another asset class such as shares.

Secondly, you may have no concept today of what point in the future you will sell the property and trigger Capital gains.  You may hold the property for 20 years without seeing the benefit of the decision and to compound the inefficiency, you have no control over the tax policy at the time of sale.

So, it comes down to control. The investor controls:

– when to receive the benefit,

– how to re-invest the benefit.

DisclaimerFor all tax related questions and to clarify all matters regarding your personal situation you should talk to our team of qualified accountants at CXC Financial Partners. The accounting team can be reached on 1300 925 081 or send an email to:

Steve Purcell is located at our head office and is the licensee of Launch Properties. He holds a PSBA License, is a licensed Auctioneer and holds a Master’s Degree in Business. Steve brings an extraordinary depth of hands on experience to the role, including twenty years in commercial and residential construction, followed by ten years in residential Real Estate sales and property development. This unique blend enables Steve to provide advice on selected developers, to ensure they are providing functional, quality assets with high quality finishes to mitigate potential sector risks to our clients. Become a client of Steve’s and get access to RP Data suburb reports, market valuations and advocacy options.

To speak with a property expert, call our team on (02) 9009 2428 or email: