Work out what an investment property actually costs you each week after the tax refund. Put in the rent, the loan and the running costs, and it shows the cash position, the loss you claim, the tax you get back and what you are really out of pocket. Nothing is saved and there is no sign-up.
The loan decides most of this number
Interest is the biggest line in the sum, so a rate that is half a per cent off costs you more than every other saving put together. A broker can tell you in one conversation whether your investment loan is priced properly.
What negative gearing actually is
Negative gearing is not a scheme. It is what happens when a property costs more to hold than it brings in. The rent does not cover the interest and the bills, you make a loss, and the tax system lets you take that loss off your other income.
That is all it is. Australia lets you claim a loss from one income source against another. It applies to shares and a business the same way. Property is just where the numbers are big enough for people to notice.
The refund is your tax rate, not the whole loss
This is the part that gets sold badly. If you lose $10,000 on a property and you are on the 37 cent rate, you get back $3,700. You are still $6,300 worse off than if the property had broken even.
Negative gearing reduces the cost of losing money. It does not turn a loss into a gain. The only thing that makes the deal work is the property going up in value by more than you lost holding it.
That is worth saying out loud because the pitch is often the other way round: hold a loss on purpose because of the tax. Nobody would take that deal on its own.
Depreciation, the deduction that costs nothing now
Two things get depreciated. The building itself, at 2.5 per cent of the original construction cost each year for 40 years, if construction started after 15 September 1987. And the fittings inside it, which wear out faster: carpet, blinds, the oven, the air conditioner.
Depreciation is the one deduction where no money leaves your account. It can turn a property that is only a little negative in cash into a decent loss on paper.
Two catches. Since 9 May 2017 you cannot claim depreciation on second-hand fittings in an established residential property, so the fittings deduction mostly belongs to new builds and to anything you installed yourself. And every dollar of building depreciation you claim comes off your cost base, so it comes back at you as capital gains tax when you sell.
You need a quantity surveyor’s schedule to claim it properly. It costs a few hundred dollars, it is deductible itself, and on a newer property it usually pays for itself several times over in the first year.
What you can and cannot claim
Claim in the year you spend it: interest on the loan, council rates, water, strata, landlord insurance, property management fees, advertising for tenants, pest control, gardening, repairs, and land tax.
Do not claim straight away: anything that improves the place rather than fixing it. A new kitchen is capital and gets depreciated. Fixing the one that was there is a repair. Repairs done straight after you buy, before a tenant moves in, count as capital too, which surprises people every year.
Never claim: your own travel to inspect a residential property. That was removed in 2017. Also, any part of the loan you drew out for something else. Redraw $50,000 for a car and that slice of interest stops being deductible, which is exactly why an offset account is the safer place to park money against an investment loan.
The number that decides whether it works
Take the after-tax cost the calculator gives you. That is what the property takes out of your life every week. Then ask what the place has to grow by each year to beat it.
On a $900,000 property costing $240 a week after tax, you are putting in about $12,500 a year. The property needs to grow about 1.4 per cent a year just to cover that, before you count selling costs and the capital gains tax at the other end. Anything above that is the return.
Write that number down before you buy, not after.
What this calculator does not do
It assumes the whole loan is against this property and that the interest shown is interest you actually pay in the year. If your loan is principal and interest, only the interest part is deductible, and it falls a little every year.
It does not split ownership between two people. If you own it 50-50 with a partner, the loss splits too, and the refund depends on each person’s tax rate. Run it twice, once for each half, if the incomes are different.
It also assumes the property is rented at market rate to an arm’s length tenant. Renting to family below market rent limits what you can claim.
General information only, not tax advice.
Questions people ask
Does negative gearing mean I pay no tax?
No. It reduces your taxable income by the size of the loss, and you get back your tax rate on that amount. You still pay tax on everything else you earn.
Is negative gearing worth it?
Only if the property grows by more than it costs you to hold. The tax refund makes the holding cost smaller. It never makes the deal itself good.
Can I negatively gear shares?
Yes. If you borrow to buy income-producing shares and the dividends do not cover the interest, the loss works the same way.
What happens when the property turns positive?
The rent eventually covers the costs, usually as rents rise and the loan shrinks. At that point the property adds to your taxable income instead of reducing it, which is a good problem.
Related calculators
- Investment property calculator — the same property over ten years, with growth and the loan coming down.
- Capital gains tax calculator — what you hand over when you eventually sell.
- Offset account calculator — why an offset beats redraw on an investment loan.
- Loan repayment calculator — what the repayment is, and what a rate rise does to it.
- Borrowing power calculator — whether there is room for the next one.
- Rental yield explained — the other number people use to judge an investment property.
Thinking about the next one?
What you can borrow decides whether there is a next one at all. A broker can put a real number on it, and tell you how this property changes it.