Negative gearing is one of the most talked-about tax strategies for Australian property investors, and one of the most misunderstood. Used well, it can reduce your tax bill while you build long-term wealth through property. Used poorly, it can leave you funding a loss year after year for a property that never grows enough to make it worthwhile.
What is negative gearing?
Negative gearing happens when the costs of holding an investment property — loan interest, council rates, insurance, agent fees, repairs, and depreciation — add up to more than the rent it earns. That shortfall is a loss, and under Australian tax law it can be offset against your other income, such as your salary, reducing your overall taxable income and the tax you pay for the year.
What expenses can be claimed against a negatively geared property?
Deductible expenses generally include mortgage interest, council and water rates, land tax, property management and agent fees, repairs and maintenance, landlord insurance, and depreciation on the building structure and eligible fixtures. Capital improvements, such as a renovation, are usually depreciated over several years rather than deducted in full in the year you pay for them, so it's worth checking the ATO's rules — or asking us — before assuming an upfront claim is available.
Do I need a depreciation schedule?
Yes, if you want to claim building and fixture depreciation. A quantity surveyor prepares a depreciation schedule that sets out exactly how much you can claim each year for the life of the property, and the cost of preparing it is itself tax deductible.
Is negative gearing the same as a good investment?
Not necessarily. Negative gearing is a tax outcome, not a strategy on its own — it simply describes what happens when a property costs more to hold than it earns. A property only makes financial sense if the capital growth over time is expected to outweigh the ongoing cash losses you're funding along the way. Chasing a tax deduction on a property with weak growth prospects is a common and costly mistake.
How does capital gains tax interact with negative gearing?
Eventually, most investors sell. When you do, capital gains tax applies to any profit, though individuals who've held the property for more than 12 months typically receive a 50% CGT discount on the gain. It's worth modelling the eventual CGT liability alongside the annual tax benefit from negative gearing — the two work together over the life of the investment, and a good adviser can help you see the full picture rather than just the annual refund.
What records should property investors keep?
Hold onto the purchase contract, all loan statements, rates and insurance invoices, agent statements, repair receipts, and your depreciation schedule. These substantiate every deduction claimed and are essential for calculating your cost base when you eventually sell. Good record keeping habits apply just as much to a rental property as they do to a business.
Should I get advice before negatively gearing a property?
Yes — the right structure to hold an investment property (personal name, trust, or via superannuation) and the timing of purchase within a financial year can both materially affect your outcome, and these decisions are much harder to unwind once made. A conversation with a tax agent before you buy, not after, is where the real value is added.
The Metier Group helps Perth property investors understand what they can claim, model the numbers before they buy, and stay on top of their obligations at tax time. Learn more about our personal tax services, or contact us to talk through your investment property.