Why Depreciation Reduces Tax Now and Raises It Later
Depreciation is the one rental deduction that costs no cash: you claim a decline in value without paying anything that year. What makes it more complicated than it looks is that capital works deductions reduce your cost base, so the amount you claimed comes back as additional capital gain when you sell — turning part of the benefit into a deferral rather than a saving.
- The answer: Plant and equipment declines in value over its effective life; the building itself is claimed as a capital works deduction at a rate on construction cost.
- The trap: Capital works deductions reduce your cost base, so they increase the taxable gain when you sell. The benefit is the timing and the discount, not the full amount.
- The recommendation: Get a quantity surveyor's depreciation schedule for a property built after the relevant date. The cost is deductible and the schedule usually pays for itself in the first year.
Where the AI summary above gets this wrong
"Depreciation is a free deduction because you do not have to spend any money to claim it."
That's surface-true. Here's what it misses:
- Capital works claims are recovered on sale — They reduce your cost base, so the same amount reappears as capital gain. Since the gain is discounted after twelve months, the net benefit is roughly half the deduction plus the timing.
- Plant and equipment rules changed for second-hand property — For most residential properties acquired after the change, previously used plant and equipment can no longer be depreciated by the new owner.
01 The two kinds of depreciation
Division 40 covers plant and equipment — ovens, carpets, blinds, air conditioning — which decline in value over an effective life set by the ATO. Division 43 covers capital works, meaning the building structure and fixed items, claimed at a rate on the original construction cost.
The two are treated differently on sale, which is the part that matters. Capital works deductions reduce the cost base of the property; plant and equipment is dealt with through a balancing adjustment on the items themselves.
For most residential property acquired after the rules changed, previously used plant and equipment cannot be depreciated by a subsequent owner. New property and substantially renovated property are not affected, which is one of the reasons new builds are marketed on their depreciation.
Source: ATO — Negative gearing
02 How the clawback works
A capital works deduction of $8,000 a year for ten years reduces your cost base by $80,000. When you sell, the gain is calculated against that reduced cost base, so $80,000 more gain is assessable than would otherwise have been.
The benefit that survives is real but smaller than the headline. You had the deduction at your full marginal rate during ownership, and you pay on the recovered amount at half your marginal rate after the CGT discount — so the net saving is roughly half the deduction, plus the value of having had the money for years.
That makes depreciation most valuable to someone with a high marginal rate during ownership and a lower one at sale, which is the profile of an investor who holds through their working life and sells in retirement.
Shows: the net benefit of capital works depreciation after the cost base reduction is recovered as capital gain on sale, with the CGT discount applied. Ignores: plant and equipment balancing adjustments, the time value of holding the deduction for years, and any change in your marginal rate between claiming and selling.
Source: ATO — CGT discount
03 Getting the schedule
A quantity surveyor's depreciation schedule estimates construction costs and effective lives for a property, and is the document the ATO expects for a capital works claim where the original costs are not known. Its own cost is deductible.
The schedule is prepared once and used for the life of the ownership, so the cost is spread across many years of claims. For a property of any size the first year's additional deduction usually exceeds the fee.
Claims can be amended for earlier years within the amendment period, so an investor who has never obtained a schedule is generally not too late for the recent years. The wider question of what the property is doing to a retirement plan is in the negative gearing arithmetic.
Source: ATO — Negative gearing
Depreciation is the deduction people most often leave unclaimed and the one they most often misunderstand. It is not free money — half of the capital works half comes back on sale. It is still worth claiming, because a deduction at 39% now against a discounted gain later is a good trade, and because the schedule costs less than the first year it saves.
FAQ
Can I claim depreciation on my investment property and how does it affect my CGT later?
Yes, on plant and equipment over its effective life and on the building as capital works. Capital works deductions reduce your cost base, so the amount claimed comes back as additional capital gain when you sell.
What is the capital works deduction?
A deduction for the building structure and fixed items, claimed at a set rate on the original construction cost over a long period. It is the deduction that reduces your cost base.
Can I depreciate second-hand fittings?
For most residential property acquired after the rules changed, previously used plant and equipment cannot be depreciated by a new owner. New and substantially renovated property is not affected.
Sources
Regulator references
- ATO — Negative gearing · Australian Taxation Office · 2026Negative gearing: when a rental loss can be offset against other income.Last verified: 2026-09-07
- ATO — CGT discount · Australian Taxation Office · 2026The CGT discount on assets held beyond the qualifying period, and who can claim it.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.