Negative gearing can reduce your taxable income, but it does not make an investment property profitable on its own.
If the deductible expenses on your rental property are greater than the rental income it produces, you may have a net rental loss. For an individual investor, that loss can generally reduce other assessable income, such as salary or business income, subject to the normal tax rules. The ATO confirms that a rental loss may be deductible against other income, with any unused amount generally carried forward.
The important part is getting the deductions, loan structure, ownership and records right.
What Is Negative Gearing?
A property is negatively geared when its deductible rental expenses exceed its rental income, leaving a net rental loss.
For example:
- Rental income: $30,000
- Deductible expenses: $40,000
- Net rental loss: $10,000
That $10,000 loss may reduce the investor’s taxable income from other sources.
But there is an important distinction: A tax deduction is not a cash refund.
The investor has still spent money to hold the property. The tax deduction simply reduces the amount of income on which tax is calculated.
That is why negative gearing should be viewed as part of an investment strategy, not as a reason to buy a property that does not otherwise make financial sense.
How Does Negative Gearing Work?
Imagine you earn $120,000 from your job and your investment property produces $25,000 rental income and $37,000 in deductible rental expenses.
Your net rental loss is $12,000.
Subject to the relevant rules, that loss may reduce your taxable income to $108,000.
The tax saving depends on your individual circumstances, including your marginal tax rate, Medicare levy and other offsets or deductions.
You are still carrying the property’s cash shortfall. That’s why you should always look at both after-tax cash flow and the property’s long-term investment prospects.
For a quick estimate, use our investment property & negative gearing calculator to model rent, interest, expenses, depreciation and your estimated after-tax cash flow.
Which Investment Property Expenses Can You Claim?
The key question is whether an expense is deductible under the tax rules and relates to earning your rental income.
Depending on the circumstances, common deductible expenses can include:
- loan interest on money borrowed for the rental property
- property management fees
- council rates and certain water charges
- landlord insurance
- eligible repairs and maintenance
- advertising for tenants
- some accounting and legal costs
- eligible depreciation and capital works deductions
- certain borrowing expenses.
Interest deserves particular attention. It may be deductible where the borrowed funds are used to produce rental income. If a loan is used partly for private purposes, the interest may need to be apportioned.
You should also distinguish between repairs and improvements.
A genuine repair may be deductible when incurred, while a renovation, improvement or certain replacement costs may be capital and claimed over time instead. An initial repair relating to a defect or deterioration that existed when you acquired the property can also receive different treatment.
Depreciation Can Make a Big Difference
Depreciation is one of the areas property investors most often overlook.
Two broad categories can be relevant:
- Division 43 capital works deductions — generally relating to eligible construction expenditure on the building and structural improvements.
- Division 40 depreciation — relating to eligible depreciating assets.
However, residential property depreciation is not as simple as claiming every fixture and appliance you find in the property.
For residential rental properties acquired after 7:30 pm on 9 May 2017, special rules generally prevent individuals from claiming deductions for the decline in value of certain second-hand depreciating assets, subject to specific exceptions.
That is one reason a properly prepared depreciation schedule can be valuable, particularly for newer properties, renovations and properties with significant eligible capital works.
How to Calculate Negative Gearing
The basic calculation is:
Rental income − allowable rental deductions = net rental income or rental loss
For example:
| Item | Annual amount |
|---|---|
| Rent received | $30,000 |
| Interest | $28,000 |
| Property management | $2,500 |
| Rates and insurance | $4,000 |
| Repairs | $1,500 |
| Other deductible costs | $1,000 |
| Depreciation/capital works | $5,000 |
| Net rental result | -$12,000 |
The property has produced a $12,000 net rental loss.
For an individual investor, that loss may be available to reduce other assessable income, subject to the applicable rules.
But notice something important: depreciation is generally a non-cash deduction. The investor did not physically pay that $5,000 during the year simply because it appears as a deduction.
That distinction helps explain why a property can have a negative cash flow but a larger tax loss.
Negative vs Positive Gearing
Negative gearing is not automatically better than positive gearing.
Negative gearing
You spend more on deductible property expenses than the property produces in rent.
Pros: potentially reduces taxable income and can make a higher-growth investment more attractive to some investors.
Cons: you need to fund the ongoing cash shortfall and remain exposed to vacancies, interest rates, repairs and market movements.
Positive gearing
The property’s rental income exceeds its deductible expenses.
Pros: stronger ongoing cash flow and less money required to support the property.
Cons: the net rental income generally increases your taxable income.
The right outcome depends on your income, cash flow, borrowing costs, investment objectives and the property itself.
Getting the Ownership Structure Right
Ownership should be considered before you purchase, not after.
An investment property held in your personal name, jointly owned, through a trust or through another structure can produce very different tax, CGT, land-tax, asset-protection and estate-planning consequences.
It is too simplistic to say that the highest-income spouse should always own a negatively geared property.
Instead, consider:
- who will legally own the property
- each owner’s current and expected income
- future capital gains
- land tax
- borrowing requirements
- asset protection
- estate planning
- what happens if the property is sold or transferred.
A structure that looks tax-efficient today may not be the best structure over a 10- or 20-year investment period.
Our property tax accounting service specifically covers ownership-structure reviews alongside negative gearing, depreciation, loan structures and CGT planning.
Be Careful With Investment Loans and Redraws
The tax treatment of interest generally follows the purpose of the borrowing, not simply the name of the loan.
If you borrow to purchase an investment property and use the funds to produce rental income, the relevant interest may be deductible.
But if you redraw from that facility to pay for a holiday, car or other private expense, the interest relating to that private borrowing is generally not deductible.
Mixed-purpose loans can therefore become difficult to calculate because the deductible and non-deductible portions may need to be tracked over time.
For that reason, keeping investment and private borrowing clearly separated is often much easier to manage.
What About Interest-Only Loans?
An interest-only loan can increase the amount of interest paid in a given period because the principal is not being reduced at the same rate as a principal-and-interest loan.
That may increase the amount of deductible interest, but more tax-deductible interest does not automatically mean a better financial outcome.
The real question is whether the loan structure works for your broader cash flow, debt strategy and investment plan.
Do not choose interest-only borrowing solely because the interest may be deductible.
Holiday Homes and Private Use
Negative gearing rules become more complicated when a property is not rented continuously.
If you use a holiday home yourself, offer it to family or friends for less than market rent, or leave it unavailable for private reasons, you may not be entitled to claim 100% of the property’s expenses.
Expenses may need to be apportioned based on periods of income-producing use and private use.
The same principle applies to properties that are only genuinely available for rent for part of the year.
Keep evidence of:
- rental periods
- private stays
- advertised rental periods
- rental income
- property-management records.
How to Use a PAYG Withholding Variation
If you expect your rental property to produce a deductible loss, you may be able to apply to the ATO for a PAYG withholding variation.
This can allow less tax to be withheld from your salary during the year instead of waiting until your tax return is lodged.
The ATO specifically recognises this option for taxpayers whose negatively geared rental property may produce a tax refund.
It is not automatic. You need to apply, and the figures you provide should reflect your expected income and deductions for the year.
This can improve cash flow, but it does not increase the overall tax benefit of the property.
When Does Negative Gearing Stop Working?
There is no fixed period after which a property “stops” being negatively geared.
The result changes as:
- rent increases or decreases
- interest rates change
- depreciation deductions decline
- repairs and maintenance fluctuate
- the property is vacant
- other expenses change.
A property that produces a $10,000 rental loss today could produce a much smaller loss next year or become positively geared later.
That is why investors should review the numbers regularly rather than assuming today’s tax position will continue indefinitely.
Negative Gearing and CGT Are Connected — But Different
Negative gearing concerns the property’s annual rental income and deductible expenses.
Capital gains tax applies when you dispose of the property and make a capital gain.
The two should therefore be planned together.
For example, depreciation and capital works deductions can reduce taxable income during the holding period, but the eventual sale may create a CGT liability and adjustments to the property’s cost base.
Our property tax accounting service includes CGT planning, while the investment property calculator can help you assess the holding costs before you commit.
The Bottom Line
Negative gearing can be useful, but the tax deduction is only one part of the investment decision.
The real questions are:
- Can you comfortably fund the cash shortfall?
- Is the property a sound investment without relying entirely on tax savings?
- Is the ownership structure appropriate?
- Are the interest and depreciation claims being calculated correctly?
- Have you considered what happens when you eventually sell?
A good negatively geared strategy should make sense before tax and after tax.
At KSH TAX, we work with Perth property investors on negative gearing, depreciation, interest deductibility, ownership structures and CGT planning. Our property tax accounting service is built specifically for investors who want the tax side handled alongside the bigger investment picture.
You can also explore our tax planning service for broader year-round planning.
Want to see what your property is really costing you after tax? Run the numbers with our investment property & negative gearing calculator or book a property tax review with one our accountants.
