Depreciation and Cap gains



From: Richard Hughes

I have some questions regarding the effect of claiming depreciation on an IP and the impact of those claims when you come to sell.

All the property seminars are keen to tell you about claiming depreciation, but a friend was telling me he ended up with a bigger tax bill when he sold because of this.

Using an example of an IP costing $100,000, say I claim $15,000 of deductions over 3 years, and I then sell the property for $125,000. Ignoring all other factors (eg CPI, buy/sell costs ...)
Is the cap gain $25,000 (ie 125-100)
Or is it closer to $40,000 (ie 125 -(100-15))

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Reply: 1
From: Paul Zagoridis

Depreciation comes straight off your base cost. So it is really a tax deferral strategy if you sell.

I haven't check if The New Tax System changed that though, but I wouldn't think so.

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Reply: 2
From: Dale Gatherum-Goss


It's $40k in your example with the new laws. If you've owned the property for more than 1 year, it is actually $20k though.

However, as always with tax, there are many strategies that might see the tax reduced to even less. It's important in this case to discuss the idea with your CPA before you sell as he/she may be able to help you before the damage is done.

I hope that this helps.

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