Depreciation and the Sale of Your Property
When you sell your investment property, the depreciation you've claimed over the years has two important tax consequences that every investor should understand before selling.
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1. The Written Down Value and Your Capital Gain
When you claim Division 40 depreciation on plant and equipment assets, the ATO tracks the "written down value" (WDV) of each asset — what it's worth on the books after depreciation.
When you sell the property, any depreciable assets that are included in the sale are notionally sold at their portion of the sale price. If that notional sale price exceeds the WDV, you have a "balancing adjustment" — which is assessable income.
Example:
- Hot water system purchased for $1,800; claimed $720 in depreciation; WDV = $1,080
- Your property sells and the hot water system is included
- Portion of sale price attributable to hot water system: $500 (less than WDV)
- Balancing adjustment: $580 write-off (deductible loss)
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2. Division 43 and Your Cost Base
This is where the impact is more significant and frequently misunderstood.
The ATO reduces your cost base by the amount of Division 43 (capital works) deductions you've claimed — or could have claimed — during your ownership.
Why? Because Division 43 deductions were supposed to represent the declining value of the building structure. When you sell, the building hasn't lost that value — the buyer is paying for it. So the ATO claws this back through a reduced cost base.
Example:
- You own a property for 10 years
- Annual Division 43 deduction: $5,000
- Total Division 43 claimed: $50,000
- Your original cost base: $450,000
- Adjusted cost base (for CGT): $450,000 − $50,000 = $400,000
- Without D43 adjustment: Capital gain = $300,000 → after 50% discount = $150,000 assessable
- With D43 adjustment: Capital gain = $350,000 → after 50% discount = $175,000 assessable
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The Rule That Many Investors Don't Know: Unclaimed Deductions
The ATO reduces your cost base by the amount you could have claimed — not just what you actually claimed.
This means that if you never obtained a depreciation schedule and never claimed any Division 43, the ATO will still reduce your cost base by the amount you were entitled to claim during your ownership.
This is a significant consideration: if you've held a property for 15 years without claiming Division 43 and you never had a depreciation schedule, you've lost both:
The double loss of not claiming depreciation is real and substantial.
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Division 40: Different Treatment
The impact of Division 40 depreciation on capital gains is handled through the balancing adjustment mechanism described above. Unlike Division 43, Division 40 does not reduce your cost base directly. Instead, it's handled at the asset level when each specific asset is disposed of (either sold with the property or scrapped).
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Strategic Planning Before Sale
If you're planning to sell an investment property, speak with your accountant and Koste about:
Koste can provide a CGT Cost Base Evidence Report to ensure all your capital improvements are documented and your cost base is maximised before sale.