Which renovation costs reduce capital gains tax?
When you sell an investment property, your capital gain is the sale price minus your cost base. Capital improvement costs incurred during ownership can be added to the cost base — effectively reducing the taxable gain. But not every renovation qualifies.
Capital improvements that can reduce CGT
The ATO allows you to include capital expenditure that:
- Added a new asset to the property
- Extended the property beyond its original state
- Improved the property's condition beyond what it was when purchased
- Building an extension, granny flat, or additional room
- Adding a deck, pool, or garage
- Major kitchen or bathroom renovation that extended the space or significantly improved the fixtures
- Adding ducted air conditioning to a property that previously had none
- Installing solar panels
- Replacing a roof with a significantly better material or specification
What cannot be added to your cost base
- Repairs and maintenance — these are deductible in the year incurred and cannot be added to the cost base
- Division 43 capital works you have already claimed — these reduce your cost base rather than adding to it
- Operating expenses — rates, insurance, management fees — these are deducted annually and do not affect cost base
The Division 43 complication
If you claimed Division 43 deductions on your renovation (2.5% per year), those claimed amounts reduce your cost base — they do not add to it. So the net addition from a $100,000 renovation to cost base depends on how many years of Division 43 you have claimed.
If you never claimed Division 43 on those improvements (perhaps you did not have a depreciation schedule), the ATO may still reduce your cost base by amounts you could have claimed — this is one of the reasons a depreciation schedule is important even if you choose not to claim.
Record keeping is essential
Keep all invoices, contracts, and council approvals related to capital improvements. Without records, it can be difficult to substantiate additions to your cost base. A quantity surveyor can help reconstruct improvement costs where original records are incomplete.