With the Australian government tightening its focus on investment property tax rules in 2025, Section 1250 has moved to the forefront for savvy investors and tax-conscious property owners. While it’s long been a feature of US tax law, Section 1250 is increasingly relevant in the local context as Australia updates its own capital gains and property depreciation policies. Here’s how this provision is shaking up property investment strategy, what’s changed in 2025, and how investors can respond smartly.
What is Section 1250 and Why Does It Matter in Australia?
Section 1250 refers to a set of rules originally from the United States Internal Revenue Code that governs the taxation of gains from depreciable real property. While the exact legislation isn’t mirrored word-for-word in Australia, the concept of recapturing depreciation and adjusting capital gains calculations is very much alive in our current tax framework. In 2025, the Australian Taxation Office (ATO) has sharpened its approach to property depreciation, particularly for commercial real estate and certain residential investment properties, making Section 1250-style provisions highly relevant for investors down under.
- Depreciation Recapture: When you sell a property, any depreciation claimed over the years can affect your capital gains tax (CGT) liability. Section 1250-style rules ensure that investors can’t permanently reduce their taxable income via depreciation and then pocket a lower-taxed capital gain on sale.
- ATO’s 2025 Crackdown: The ATO has rolled out new compliance measures this year targeting incorrect or excessive depreciation claims, especially in the wake of the property market’s post-pandemic rebound.
- Broader Impact: The rules apply not just to large-scale commercial property owners, but also to residential investors who have used accelerated depreciation schedules or invested in new builds.
How Section 1250-Style Rules Affect Australian Investors in 2025
This year, the ATO clarified that any capital works deductions (Division 43) or plant and equipment depreciation (Division 40) claimed since 2017 may be subject to recapture when the property is sold. This means a portion of the gain previously reduced by depreciation must now be added back into the assessable income, potentially at your full marginal tax rate rather than the discounted CGT rate.
Example: Sarah bought a commercial property in Melbourne in 2018 and claimed $80,000 in depreciation over seven years. When she sells in 2025, the ATO will require her to ‘recapture’ those deductions, adding them to her taxable income for the year of sale, and not just to her capital gain.
Key implications for investors:
- Tax Liability Surprise: Many investors are caught off-guard by the size of the tax bill when they sell, especially if they’ve aggressively claimed depreciation.
- Timing Matters: Selling after holding a property for more than 12 months still qualifies for the 50% CGT discount, but the depreciation recapture is taxed at your normal rate.
- Record-Keeping: The ATO’s 2025 updates include digital audits of depreciation schedules, so meticulous records are more important than ever.
Strategies for Navigating Section 1250 in 2025
While the new rules may seem daunting, there are ways for investors to adapt and optimise outcomes:
- Revisit Depreciation Schedules: Work with a qualified quantity surveyor to ensure all claims are accurate, up-to-date, and compliant with the latest ATO interpretations.
- Plan Your Sale: Consider the timing of property sales to manage your overall tax bracket and cash flow, particularly if you’re expecting a large recapture event.
- Maximise Offsets: Offset recaptured depreciation with capital losses or deductible expenses elsewhere in your portfolio.
- Stay Informed: With the ATO signalling further reviews of property investor tax practices, keep an eye on policy changes through 2025 and beyond.
Some investors are already adjusting their strategies—opting for properties with lower depreciation schedules or using trusts to better manage tax liabilities on sale. The ATO’s new digital property register, rolling out this year, is expected to make enforcement even tighter.
Conclusion: Knowledge is Power for Property Investors
Section 1250-style rules are now an unavoidable part of the Australian property investment landscape in 2025. Investors who understand how depreciation recapture works—and plan for it from day one—will be in a stronger financial position when it comes time to sell. Don’t let a surprise tax bill erode your hard-earned gains: get proactive, update your records, and review your investment strategies for the new era of property taxation.
