Negative Gearing in Australia: The Tax Strategy That's Not Free Money

Part 4 of the Property Investment Gotchas 101 series.

How It Actually Works

Let’s crunch a basic example:

Earning $90,000 salary? That $10,000 loss drops your taxable income to $80,000. At the 30% marginal rate (2025/26), you save $3,000 in tax.

Sounds like a sweet deal — until you clock that the property lost $10,000 in actual cash. You “saved” $3,000 but you’re still $7,000 out of pocket.

What You Can and Can’t Claim

The ATO has detailed guidance on rental expenses. The key categories:

Claim straight away:

• Mortgage interest
• Council rates and water
• Insurance (landlord, building, contents)
• Property management fees
• Advertising for tenants
• Pest control, gardening, cleaning
• Tax agent fees (rental portion)

Claim over time (depreciation):

• Division 43: Building capital works (2.5%/year for properties built after 1985)
• Division 40: Plant and equipment (carpet, blinds, appliances, hot water systems)

Can’t claim:

• Purchase costs (stamp duty, legal fees) — these go into your CGT cost base
• Improvements vs repairs — a brand new kitchen is capital, not maintenance
• Personal use — if you stay at the property yourself, you have to apportion

Heads up: The ATO ramped up scrutiny on rental claims in 2024/25. Rental properties are one of their top focus areas. Calling an improvement a “repair” and claiming expenses during vacancy without proof you tried to find tenants are classic audit triggers.

For the current federal tax watchlist, see Australia Rental Tax Changes 2026: What the ATO Is Watching, which focuses on deduction evidence, apportionment, co-ownership, holiday homes, family rentals, and redraw records.

Negative vs Positive Gearing

Plenty of experienced investors aim for positive gearing — especially in regional areas with higher rental yields. Capital-city properties tend to be negatively geared because prices are higher and yields are lower.

Australia vs NZ — Chalk and Cheese

This is one of the biggest differences between the two markets:

NZ effectively killed negative gearing through interest deductibility limits and ring-fencing. Australia kept it — and that’s one of the key factors in the New Zealand vs Australia investment comparison.

The Depreciation Trap

Depreciation is a paper deduction — you claim “wear and tear” on the building and fitout without actually spending money. Makes the numbers look great.

But here’s the catch: When you sell, the depreciation you claimed on plant and equipment gets added back to your CGT calculation (the “balancing adjustment”). You’re not dodging tax permanently — you’re deferring it.

New properties have big depreciation deductions in the first 5–10 years. Older places (pre-1985, no recent renos) — barely anything to claim.

The Document Trail

Negative gearing means keeping proper records. For every rental property:

• Annual mortgage interest statement — the biggest deductible expense
• Rental income records — agent statements or direct payment records
• Rates notices — council and water
• Insurance certs — premiums are deductible
• Repair and maintenance receipts — and you need to sort repairs (deductible) from improvements (capital)
• Property management statements — fees and itemised costs
• Depreciation schedule — from a qualified quantity surveyor
• Purchase records — for your CGT cost base when you eventually sell

Across a few properties, that’s hundreds of documents a year. The full list of document types is in our document types guide, and AI document management can automatically sort expense amounts, flag repair vs improvement invoices, and pull together the records the ATO expects if they come knocking.

For Australia-wide tax record signals and state-specific compliance context, pair this with Australia Rental Tax Changes 2026: What the ATO Is Watching and Australian Landlord Compliance Gap Report 2026.

The Short Version

1. Negative gearing saves you 30–37 cents per dollar lost — not dollar-for-dollar
2. You fund the cash flow gap from your own pocket
3. The ATO is watching — especially repair vs improvement claims
4. Depreciation deductions get partially clawed back through CGT on sale
5. It only works if capital growth eventually exceeds your total after-tax losses
6. Kiwi investors: NZ effectively binned this strategy — it’s a genuine reason some look across the ditch

For where negative gearing sits among the other recurring decisions Australian landlords have to make, see our reality-check companion guide What Amateur Property Investors Actually Need in Australia.

Next up: Capital Gains Tax Australia — The 50% Discount Trap