Negative Gearing and Depreciation: How Property Investment Reduces Your Tax Bill

An investment property is negatively geared when the costs of owning it — interest, rates, insurance, property management fees, maintenance — exceed the rental income it generates. That shortfall is a net rental loss.

In Australia, that net rental loss can be offset against your other income — including your salary or business income. If you’re earning $150,000 per year and your investment property generates a net rental loss of $15,000, your taxable income drops to $135,000. At a marginal tax rate of 37%, that’s roughly $5,500 in tax savings.

The investment property is costing you money on paper — but the real cost is reduced by the tax benefit you’re receiving. The bet you’re making is that capital growth over time will more than compensate for the cashflow shortfall while you hold.

Depreciation: The Tax Benefit That Requires No Cash Outlay

Depreciation is where things get genuinely interesting — because it’s a tax deduction that requires no cash to be spent.

As an investment property ages, the building itself and the fixtures, fittings, and equipment within it depreciate in value. The ATO allows property investors to claim this depreciation as a tax deduction each year, reducing taxable income without requiring any actual expense to be paid.

There are two categories of depreciation relevant to property investors.

Capital works deductions cover the structural elements of the building — walls, roof, floors. These are generally claimed at 2.5% of the construction cost per year.

Plant and equipment depreciation covers the removable assets — carpets, blinds, ovens, air conditioning units, hot water systems. These depreciate at varying rates depending on the asset’s effective life.

A qualified quantity surveyor can produce a depreciation schedule that maximises every legitimate deduction available within the property. Investors who skip this step often leave thousands of dollars in deductions unclaimed each year.

New Versus Established Properties: The Depreciation Consideration

New properties offer higher depreciation deductions, because the construction cost is recent and plant and equipment is new. An investor purchasing a brand-new townhouse in Brisbane could be looking at depreciation deductions of $10,000 to $20,000 per year in the early years of ownership — entirely on top of the interest and expense deductions.

Established properties offer lower depreciation deductions, particularly for plant and equipment purchased after 2017 when legislation changed. However, they may offer better capital growth fundamentals, more established rental markets, and stronger yield positions in some locations.

The right choice depends on the individual investor’s tax position, cashflow requirements, and investment goals.

Structuring Matters

The benefits of negative gearing are most powerful for investors on higher marginal tax rates. For investors on lower incomes, a positively geared approach — where the property generates more income than costs — may be more appropriate.
The structure in which the property is held also affects how deductions are applied. Losses in a trust or company structure cannot be applied against personal income in the same way as a property held personally.

This is why getting the structure rightbefore you buy is so important. The tax benefits of property investment arereal and substantial — but they need to be designed into the structure, notdiscovered after the fact.

Living Property Partners works withclients to ensure every element of their investment structure is optimisedbefore they purchase. Book a free consultation to understand how propertyinvestment could reduce your tax position.