Investment Property Tax Guide: Negative Gearing and CGT Explained

Investment property remains a popular wealth-building strategy in Australia, partly due to favourable tax treatment including negative gearing and capital gains tax discounts. Understanding how property investment is taxed helps you make informed decisions and maximise after-tax returns. This guide covers the essential tax considerations for Australian property investors in 2025-2026.

Rental Income and Tax

When you rent out a property, the rental income you receive is assessable income that must be declared in your tax return. This includes not only regular rent payments but also bond money you retain, insurance payouts for loss of rent, and any payments from tenants for breaking a lease early.

Rental income is added to your other income and taxed at your marginal tax rate. For someone earning $100,000 in salary and receiving $20,000 in rental income, the rental income would be taxed at the 30% marginal rate under current tax brackets.

However, the net position depends on your deductible expenses. If your expenses exceed your rental income, the resulting loss can be offset against your other income, reducing your overall tax liability. This is the basis of negative gearing.

Understanding Negative Gearing

Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates. The resulting loss can be deducted from your other assessable income, such as salary and wages, reducing your overall taxable income and therefore your tax.

For example, if your rental property generates $25,000 in annual rent but your expenses (interest, rates, insurance, repairs, depreciation) total $35,000, you have a net rental loss of $10,000. This loss offsets your other income, so if you earn $100,000 from employment, your taxable income reduces to $90,000, saving you $3,000 in tax at the 30% marginal rate.

Negative gearing is a legitimate tax strategy that has been part of Australian tax law for decades. It works because the expenses are genuine costs of earning income, and tax law allows losses from one source to be offset against income from another.

Deductible Property Expenses

Property investors can claim a wide range of expenses as deductions. Understanding what you can claim is essential for maximising your after-tax returns.

Interest on loans used to purchase the investment property is typically the largest deduction. You can claim interest on the portion of the loan used for investment purposes. If you have drawn on equity from the loan for personal use, you need to apportion the interest accordingly.

Council rates, water rates, and land tax are deductible in the year they are paid. Property management fees, including commissions for finding tenants and ongoing management, are fully deductible. Landlord insurance premiums and strata fees are also claimable expenses.

Repairs and maintenance that restore the property to its original condition are immediately deductible. This includes fixing broken items, repainting in the same colour, and replacing like-for-like components. However, improvements that enhance the property are capital works and must be claimed as depreciation over time.

Depreciation and Capital Works

Depreciation is often an overlooked deduction that can significantly improve your after-tax position. It recognises that the building and its fixtures lose value over time.

There are two types of depreciation claims. Division 40 assets are the removable fixtures and fittings like carpets, blinds, air conditioners, and appliances. These are depreciated over their effective life, which varies by asset type. Division 43 covers the structural elements of the building itself and is claimed at 2.5% per year for buildings constructed after 1985.

A quantity surveyor's depreciation schedule identifies all claimable items and calculates the deductions available each year. While there is an upfront cost for the schedule, it typically pays for itself many times over in additional deductions. For older properties, the fixtures and fittings depreciation can still be significant even if the building itself has limited remaining capital works deductions.

Capital Gains Tax on Property

When you eventually sell an investment property, any profit is subject to Capital Gains Tax (CGT). The capital gain is calculated as the sale price minus the cost base, which includes the purchase price, stamp duty, legal fees, and the cost of any capital improvements.

If you have owned the property for more than 12 months, you are entitled to the 50% CGT discount. This means only half of your capital gain is added to your assessable income and taxed at your marginal rate.

For example, if you sell a property for $600,000 that you purchased for $400,000 (with $20,000 in costs), your gross capital gain is $180,000. With the 50% discount (assuming you held it more than 12 months), only $90,000 is added to your taxable income for that year.

Be aware that depreciation claims reduce your cost base, potentially increasing your capital gain when you sell. However, the tax benefit from claiming depreciation over many years usually outweighs the slightly higher CGT on sale.

The Interplay of Negative Gearing and CGT

The classic property investment strategy involves accepting short-term losses (tax deductible) in exchange for long-term capital growth (taxed at a discounted rate). The tax benefit of negative gearing partially offsets the holding costs while you wait for the property to appreciate in value.

This strategy works best in rising markets and for investors in higher tax brackets. Someone in the 45% tax bracket gets more benefit from negative gearing losses than someone in the 30% bracket, as the tax saving per dollar of loss is higher.

However, the strategy does not work if the property fails to appreciate in value. Negative gearing should never be the primary reason for purchasing a property; it should be considered as a cash flow benefit while you build wealth through genuine capital growth.

Record Keeping Requirements

Property investors must keep comprehensive records to support their deduction claims. This includes loan documents showing interest payments, receipts for all expenses, records of rental income received, evidence of the purchase price and associated costs, and the quantity surveyor's depreciation schedule.

Records must be kept for at least five years after the sale of the property. For CGT purposes, records relating to the purchase and improvements need to be kept for the entire period of ownership plus five years after sale.

Common Mistakes to Avoid

Property investors often make mistakes that can result in disallowed deductions or ATO audit issues. Common errors include claiming the full interest on a loan that was partly used for personal purposes, claiming improvements as immediate repairs rather than capital works, failing to apportion expenses for properties that were only available for rent for part of the year, and not adjusting for private use if the property is occasionally used personally.

Another mistake is not obtaining a depreciation schedule, leaving thousands of dollars in legitimate deductions unclaimed. Professional advice can help ensure you are claiming correctly and maximising your entitled deductions.

Conclusion

Investment property taxation in Australia offers significant benefits, including the ability to offset losses against other income and a 50% CGT discount for long-term holdings. Understanding these rules helps you structure your investment for maximum after-tax returns.

While the tax benefits can be attractive, property investment decisions should always be based on sound fundamentals: location, quality, potential for capital growth, and rental yield. Tax concessions enhance returns but cannot make a poor investment into a good one. To understand how rental income and losses affect your overall tax position, use our free Australian tax calculator.