What is negative gearing for investment properties and how does it work in Australia?

Negative gearing occurs when the costs of owning an investment property (such as loan interest, maintenance, and depreciation) exceed the rental income it generates. The resulting loss can be offset against your other income, including your salary, which reduces your overall taxable income.

How it works in practice:

• Rental income: A$25,000 per year
• Deductible expenses: A$35,000 per year (interest, rates, insurance, depreciation, repairs)
• Net rental loss: A$10,000
• This A$10,000 loss is deducted from your other taxable income

If your marginal tax rate is 30%, the A$10,000 loss saves you A$3,000 in tax.

Deductible expenses for rental properties include:

• Loan interest on the property mortgage
• Council rates and body corporate fees
• Property management fees
• Insurance premiums
• Repairs and maintenance (but not improvements, which must be depreciated)
• Depreciation of the building (capital works deduction at 2.5% per year for properties built after September 1987) and plant and equipment assets

Key rules and limitations:

• You must genuinely intend to earn rental income from the property. The ATO may disallow deductions if the property is not available for rent or is rented below market value to family members.
• Positive gearing is the opposite, where rental income exceeds expenses, resulting in taxable profit.
• When you eventually sell a negatively geared property, the capital gain will be subject to CGT. If held for more than 12 months, the 50% CGT discount applies.
• The ATO closely scrutinizes rental property deductions and this is a common audit area. Always keep complete records.