The Impact of Depreciation Claims over Capital Gains Tax

What happens when you decide to sell your property? As per Australian tax rules, every such sale attracts something called the Capital Gains Tax (CGT). The question, then, is what impact would the claimed depreciation have on the CGT payable? Before we attempt to list those points, let us get the basics right first.

CGT and the effect of depreciation claims over it

A gain or loss happens when a product is sold at a price that is higher or lower respectively than the cost of buying it. Assuming a gain, it would be over and above capital buying costs. This difference is called a capital gain, and the tax applied to it is CGT. If depreciation has been claimed on it, the cost base changes. This is what impacts the CGT applicable.

Here are some factors listed below which you should be aware of in case you have claimed depreciation on your rental or investment property. All these factors have different impacts on the CGT payable.

Capital Works vs Plant and Equipment

These are the two broadheads on which depreciation can be claimed in the federal tax depreciation schedule. Capital Works refers to the permanent fixtures that make up a property. It includes things like floors, walls, ceilings, windows, tiles, and floors. If depreciation is claimed on them, then the base cost on them reduces. This increases the difference between the sale price and the cost. This results in higher capital gains and therefore higher CGT. The depreciation on Plant and Equipment is calculated on easily removable assets. This would include things like carpets, upholstery, furniture, or electrical gadgets. When these are replaced in the property and depreciation claimed, the cost base increases. Therefore there is a smaller gap with the sale price, and so capital gains get reduced. This results in a reduced CGT. So both these heads of depreciation have the opposite effect on CGT.

Residential vs Rental

The way you calculate depreciation on rental property (where a tenant stays) is different from how you do it for the occupied property (where you stay). If you reside in your property, you are exempted from CGT. The land on which your property stands must be less than 2 hectares. If you move out and give the property on rent, then this CGT exemption is applicable only up to the first 6 years after you leave the property. This is valid if you do not own any other property.


Everyone invests in property to make money. This could be done by selling when the prices are high or by renting it out and earning rental home returns. The trick is to assess the comparative scenarios as detailed above. Once that is done, you will know the right balance.

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