Does depreciation increase capital gains tax on a rental?

The building part of it does. A capital works deduction, the building write-off a rental owner claims each year, lowers the property's cost base by the amount claimed. The same sale price then leaves a bigger capital gain.

This is the law as read on 5 October 2026.

What is the rule?

For a property acquired after 7:30 pm on 13 May 1997, the capital works deductions you claimed or could have claimed are left out of its cost base (Income Tax Assessment Act 1997, s 110-45). The ATO sets this out under cost base adjustments for capital works deductions.

What else is in the cost base?

A capital gain is the sale proceeds less the cost base (s 104-10). The cost base has five parts (s 110-25):

1. What you paid for the property.
2. The costs of buying and selling, such as stamp duty, legal fees and an agent's commission.
3. The costs of owning it, such as loan interest, rates, land tax and insurance, but only for a property acquired after 20 August 1991.
4. Capital spending that increases or keeps its value.
5. Spending to defend your title to it.

A cost you have deducted, or can deduct, generally stays out of the cost base. That is why the costs of owning are rarely in it for a rental: the interest and rates were claimed against the rent.

From 2027-28, a cost held back by the new rental loss rule stays out too (s 110-38).

What does it look like?

In the ATO's example, Yusef and Marie buy a rental for $170,000 and pay $350 in surveyor's fees and $750 in stamp duty. Neither comes off the rent, so their cost base is $171,100, the price plus those two costs. Any capital works deductions they claim later would lower it.

For example, a house bought in June 2019 for $329,000 has $14,500 of buying costs recorded and $9,000 of capital works deductions claimed to date.

The property's Purchase and costs page shows all three, so the gain on its If sold page is worked from the cost base that is left.

Is a repair different from capital works?

Yes. A repair that replaces part of something worn out is claimed in the year it is incurred and does not touch the cost base. Fixing damage that was there when you bought, and improvements, are capital instead.

Replacing a whole structure, such as a fence, is capital works, generally claimed at 2.5% a year over 40 years, and then it lowers the cost base as above.

Does the July 2027 change touch this?

The cost base rules above stay. From 1 July 2027, cost base indexation and a 30% minimum tax replace the 50% discount for individuals, and a property held across that date is treated as sold just before it and bought back that day.

A lower cost base still means a bigger gain, so the post on indexation follows the next step.

What should I keep?

• The contract and the settlement statement, for the price and the buying costs.
• Each year's capital works deduction, from the depreciation schedule or the return.
• Receipts for capital spending that adds to the property.

You keep the records until 5 years after it is certain no further capital gains tax event can make them relevant, which for a sale is normally 5 years after it. The capital gains tax calculator asks for what the property cost and works the gain from it.