Does Depreciation Affect Capital Gains Tax on Property Investments?

If you’re a property investor and haven’t explored the benefits of depreciation, you could be leaving thousands of dollars on the table—every single year.

Depreciation is one of the most valuable tax deductions available for investment properties. Yet many investors still fail to claim it properly—or worse, ignore it altogether. Whether it’s because they don’t understand it, think their accountant has it covered, or simply believe it doesn’t apply to their property, the result is the same: missed deductions and possible non-compliance with ATO regulations.

But a common question we hear is this:

“If I claim depreciation now, won’t it increase my Capital Gains Tax when I sell?”

Let’s unpack this. We’ll walk you through the basics of CGT, how depreciation interacts with it, and why you should still be claiming every dollar you’re entitled to.

What is Capital Gains Tax (CGT)?

Capital Gains Tax is the tax you pay on the profit from selling an investment property. It applies to the difference between your selling price and your cost base—what you paid for the property, plus certain associated costs.

Here’s a simple breakdown:

• Capital Gain = Sale Price – Cost Base
• This gain is then added to your assessable income and taxed at your marginal tax rate.

If you held the property for more than 12 months, you may qualify for a 50% CGT discount, which halves the taxable gain.

What Is Net Capital Gain?

Your net capital gain is:

• Your total capital gains
  minus
• Any capital losses
  minus
• Any discounts or concessions (e.g. the 50% discount for holding over 12 months)

This is the figure the ATO uses when assessing your annual tax return.

What is Property Depreciation?

Depreciation allows you to claim a tax deduction for the wear and tear on both the building and the assets inside it over time.

The ATO permits two types of depreciation deductions:

1. Capital Works – for structural elements like walls, floors, ceilings, tiles, sinks, windows, etc.
2. Plant and Equipment – for removable items like appliances, carpets, blinds, hot water systems, and air conditioners.

Depreciation reduces your taxable income, which in turn improves your cash flow.

But here’s where it gets interesting…

Does Depreciation Increase Capital Gains Tax?

Yes—but not always in the way you might think.

Let’s break it down:

1. Capital Works Depreciation and CGT

When you claim capital works deductions (e.g. on the structure of the building), those amounts are subtracted from your cost base when calculating CGT.

So yes, it can increase your capital gain—and therefore your CGT payable—at the point of sale.

Think of it this way:

• You get to reduce your taxable income every year while holding the property.
• But you may end up paying slightly more CGT when you sell.

Still, the upfront annual savings often outweigh the future CGT increase—especially when you apply the 50% CGT discount.

2. Plant and Equipment Depreciation and CGT

This one’s different.

Plant and equipment items are treated separately from the property itself. If you sell the property, the ATO requires you to assess a gain or loss for each depreciable item, based on its termination value (sale value) versus its written-down value.

Most investors sell plant and equipment at their written-down value, meaning no gain or loss, and therefore no CGT impact.

But if these assets are sold for more than their written-down value, there may be a capital gain on those specific items—and vice versa.

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Can You Claim a CGT Discount as an Investor?

Absolutely.

If you’ve held the property for over 12 months, individuals and small businesses are eligible for a 50% CGT discount.

So while claiming depreciation might increase the gross capital gain, this discount slices your tax bill in half. It’s a win for long-term investors.

What About Your Primary Residence?

Good news: your home is exempt from CGT—provided:

• You’ve lived in it as your principal place of residence.
• The land is less than 2 hectares.
• It hasn’t been used to earn income during the exemption period.

If you move out and rent it, you may still claim the exemption for up to six years, as long as you don’t nominate another property as your primary residence.

Each time you move back in, a new six-year period starts. There’s no limit to how many times you can do this—just make sure your absences are under six years and you only claim one property as your main residence at a time.

How Depreciation Boosts Cash Flow During Ownership

The beauty of depreciation is that it reduces your taxable income each financial year.

If you own a residential investment property, you may be entitled to thousands of dollars in depreciation deductions—money that stays in your pocket instead of going to the ATO.

To maximise this, you’ll need a Tax Depreciation Schedule prepared by a qualified Quantity Surveyor. This outlines every eligible deduction across the life of your property—often 40 years or more.

Bonus: the cost of this report is 100% tax-deductible.

Should You Still Claim Depreciation if It Affects CGT?

In most cases, yes.

Here’s why:

• The annual tax savings from depreciation usually exceed the added CGT liability at sale.
• Depreciation boosts your cash flow every year, helping you reinvest, reduce debt, or build a buffer.
• You still benefit from the 50% CGT discount if you’ve held the property longer than 12 months.

Let’s put it into context.

Case Study: The True Impact of Depreciation on CGT

John bought an investment property in 2016 for $550,000. He had a depreciation schedule prepared and claimed:

• $17,500 in capital works deductions
• $12,500 in plant and equipment deductions

He sold the property in 2021 for $700,000.

Capital Gain Calculations:

• Purchase price: $550,000
• Sale price: $700,000
• Capital gain: $150,000
• Add back capital works claimed: +$17,500
• Total capital gain: $167,500
• 50% CGT discount: $83,750
• Taxable gain at 45% tax rate: $37,688
• Net profit after tax: $112,312

Now let’s consider John’s savings during ownership:

• Claimed $17,500 in capital works = saved $7,875 (45%)
• Claimed $12,500 in plant & equipment = saved $5,625 (45%)
• Total savings during ownership: $13,500

Even though his CGT bill increased by $3,938 due to depreciation, John still came out ahead by $9,562.

How to Get Started With Depreciation

To take advantage of depreciation:

1. Order a Tax Depreciation Schedule from a qualified Quantity Surveyor.
2. Ensure your accountant applies it properly in your tax returns.
3. Keep records of depreciation claimed—this will be important when calculating CGT upon sale.

MCG Quantity Surveyors offer one of the most trusted tools for this. Their average first-year depreciation deduction is over $9,249.50 (based on the 2020 MCG 1,000 Assets Study).

📞 Contact MCG at 1300 795 170 for a quote or consultation.

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Depreciation doesn’t just improve your annual tax position—it’s part of a smart, long-term strategy. While it can increase your capital gain at sale due to adjustments in the cost base, the net benefit is often well worth it—especially when you leverage tools like SuburbsFinder and expert support from Quantity Surveyors.