Depreciation and Capital Gains

Taxation can be a bland subject, but it’s something that makes a massive difference to investors when understood properly. This week I want explore capital gains tax and how it is impacted by your property’s depreciation. For those that aren’t familiar with either, I’ll cover off on both of these first, so we are on the same page.

Capital Gains Tax

Capital gains is the tax that you pay once you sell your property and make a profit. Your property’s resale price, minus the original purchase price (cost base) is taxed by the government upon the transfer of your property. See below for a more basic overview.


Example 1:

Taxable Capital Gain = (Cost Base – Resale Value)

= ($500,000 – $400,000)

= $100,000



The Australian Tax Office allows the investor to offset a certain amount of money each year for the fact the materials of the building are worth less today than they were yesterday, and continue to drop in value (depreciate) over time. This can come in the form of building depreciation and plant and equipment depreciation.

These two seemingly mundane aspects are interrelated and can make a big difference for investors in the long run. In a nutshell, the amount that you depreciate over the lifetime of your property lessens your cost base. Meaning, that for every dollar that you claim back in tax, your taxable amount is maximised when it come time to sell. Once again, this can be easier understood through a visual, so see below how depreciation impact your capital gains.

Example 2:

Taxable Capital Gain = Resale – (Cost Base – depreciation)

= $500,000 – $370,000

= $130,000

So, it seems that claiming depreciation is bad for your pocket when it come time to sell, but not claiming depreciation will strain your annual cashflow. Your damned if you do, damned if you don’t right? Wrong.

By claiming your properties depreciation cost you can effectively save more money and expand on a strong portfolio. It also provides you with a healthy cashflow to uphold your current properties in a dynamic market and claim your money sooner. At the end of the day you should be allowing for at least 10-15 year hold, which is a long time to wait for your money. This advantageous cashflow position ultimately allows clients to leverage their money strongly and build quality portfolio’s.

Getting industry knowledge can almost be like insider trading. Allow yourself to study aspects such as taxation benefits that the average investor doesn’t understand will inevitably allow you to gains stronger results. Your taxation professionals and quantity surveyors are the best in the industry to provide you with this knowledge. On the other hand, for all things property investment get into Blue Wealth and get educated today.

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