Depreciation and CGT

Just wanted to highlight a common misconception about depreciation and CGT. I’ve noticed the anti-negative gearing people generally say that depreciation isn’t actually useful because it reduces your cost base and so you have to cough it back up as CGT eventually. The pro-negative gearing people tend to say ‘save tax’ and don’t mention the eventual CGT hit.

As an aside, I go for positive cashflow. Currently my properties are negatively geared for tax but cashflow neutral.

However, the reality is halfway between this. Yes, you get tax deductions at your marginal tax rate for depreciation, and yes, you have to pay CGT on that reduced cost base, but remember CGT is only (for individuals) at HALF your marginal tax rate.

So on depreciation of $10,000 and marginal tax rate of 47%:

Tax saved $4,700

and when you sell the property, your CGT on this is: $2,350

$4,700 saved now is also much better than $2,350 in 5 or 10 years time when you sell the property due to inflation, opportunity cost, etc.

So the reality is that depreciation is better than the anti-negative-gearers say, but not as good as the pro-negative-gears say.
Alex