What is negative gearing and how does it work in Australia?
Negative gearing occurs when the costs of owning an investment property exceed the rental income it earns. The difference — the net rental loss — is deductible against your other assessable income, most commonly your salary or wages. This reduces your total taxable income and, in turn, your annual ATO tax bill.
In practical terms: if your investment property generates $28,600 in rent but costs $45,000 a year to hold (mortgage interest, rates, insurance, management fees, and depreciation), you have a net rental loss of $16,400. At a 37% marginal tax rate, that loss saves you $6,068 in tax — money the ATO effectively contributes toward your holding costs.
What expenses can you claim on a negatively geared property?
- Mortgage interest: The largest deduction for most investors. Only the interest component is deductible — principal repayments are not. If you use the property as security for a mixed loan, only the investment-purpose portion qualifies.
- Property management fees: Agent commissions, letting fees, and inspection costs are fully deductible in the year incurred.
- Council rates and land tax: Both fully deductible as holding costs in the year they are paid.
- Insurance: Landlord insurance, building insurance, and contents insurance premiums are deductible.
- Repairs and maintenance: Restoring the property to its original condition is immediately deductible. Adding value (renovations, extensions) must be depreciated over time.
- Body corporate / strata fees: Fully deductible for investment properties.
- Depreciation: A non-cash deduction that requires no out-of-pocket payment but reduces your taxable income. Covers the building allowance (2.5% for 40 years on post-1987 constructions) and plant and equipment items.
Depreciation — the deduction most investors miss
Depreciation is the most commonly overlooked negative gearing deduction, and also one of the most valuable because it costs you nothing in cash. The ATO allows you to claim the decline in value of the building structure and its fixtures and fittings each year.
Division 43 building allowance: For residential properties constructed after 15 September 1987, you can claim 2.5% of the original construction cost per year for 40 years. On a property that cost $300,000 to build, that's $7,500 per year in deductions — every year, regardless of whether you spend a dollar on the property.
Division 40 plant and equipment: Items like carpets, blinds, hot water systems, air conditioning units, and kitchen appliances each have their own effective life as set by the ATO. A quantity surveyor report identifies all claimable items and their depreciation rates. Reports typically cost $600–$800 but generate far more in annual deductions.
Important ATO rule: For properties purchased after 7 May 2017, second-hand plant and equipment (items already in the property when you buy it) can no longer be depreciated by individual investors. Only new properties or properties where you install new items from scratch qualify for plant and equipment depreciation. The building allowance under Division 43 is unaffected by this rule.
Negative gearing vs positive gearing — which is better?
Negative gearing is not inherently superior to positive gearing. The strategy makes financial sense when capital growth exceeds the after-tax holding cost. If you're paying $150 per week net after tax to hold a property that grows at 6% per year, you're building substantial equity. If the property doesn't grow, you're simply losing money with a tax subsidy.
The debate in Australia often centres on tax bracket. At a 45% marginal rate, the ATO effectively funds 45 cents of every dollar of net rental loss — making the real cost of holding significantly lower. At a 19% rate, the subsidy is much smaller and positive gearing (where rent exceeds costs) becomes more attractive.
Properties in high-growth areas with strong rental demand can start negatively geared and transition to positive gearing over time as rents rise while mortgage interest costs remain flat — the ideal outcome for long-term investors.
How this calculator works
The calculator models an interest-only loan structure — which is the most common arrangement for investment property because it maximises the deductible interest expense. Annual rental income is calculated from your weekly rent input multiplied by 52. All expense inputs (interest, council rates, insurance, management fees, and depreciation) are summed to produce the gross rental loss. The tax saving equals the net loss multiplied by your marginal tax rate. The weekly out-of-pocket cost is the gross cash loss (excluding non-cash depreciation) minus the annual tax saving, divided by 52.
The 10-year projection applies your stated capital growth rate to the property value each year and holds the loan balance constant (interest-only). Equity is the difference between projected property value and loan balance. Total tax saved is the annual saving compounded over 10 years, and total net cash cost is the annual after-tax cash outflow over the same period — giving you a clear picture of the real cost of the strategy over time.
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