Australian negative gearing — a complete analysis.
Negative gearing isn't a tax — it's a tax concept. It describes the position when an investment's deductible costs (interest, depreciation) exceed the income it generates, creating a paper loss that can offset other income.
Australian negative gearing — a complete analysis.
Negative gearing isn't a tax — it's a tax concept. It describes the position when an investment's deductible costs (interest, depreciation) exceed the income it generates, creating a paper loss that can offset other income.
How negative gearing works
When an investment property's rental income is less than its deductible costs (loan interest, council rates, repairs, depreciation, agent fees), the resulting loss is deductible against other assessable income — typically your salary or business profits. The benefit accrues most strongly to investors on higher marginal tax rates.
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Why investors use it
Lower tax — Offsetting income from your day job with property losses reduces taxable income — most effective for higher marginal-rate taxpayers.
Capital efficiency — Use leverage to access a larger asset and compound growth without tying up all your cash.
Long-term capital growth — Property generally appreciates over time. Holding the asset isn't a taxable event — the capital gain is realised on sale, with the 50% CGT discount available for individuals holding more than 12 months.
Wider investment universe — You can target growth corridors rather than chasing yield, broadening your investment options.
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Beyond cash costs (interest, council rates, insurance, property management, repairs), tax law lets you deduct non-cash items that can create a paper loss without any actual cash outflow:
- Division 43 capital-works depreciation (the building shell, typically 2.5% pa)
- Division 40 plant and equipment depreciation (carpets, blinds, appliances)
- Loan establishment costs deducted over five years
- Prepaid interest in certain circumstances
