Negative gearing is a phrase that comes up often in property conversations, but the mechanics behind it are often only partly understood. The ATO’s position is straightforward: when the deductible costs of holding an investment property exceed the rental income it generates, the resulting net loss can generally be offset against an investor’s other assessable income.

Depreciation is part of that picture, and often it’s the part investors underestimate or skip altogether. Because it is a non-cash deduction, it can add meaningfully to that loss without the investor spending anything further, and getting it right generally calls for a specialist rather than a rough estimate.

TL;DR

  • Negative gearing occurs when an investment property’s deductible costs exceed its rental income, creating a net loss that can be offset against other assessable income
  • Depreciation is a non-cash deduction that is often underestimated, and it can meaningfully increase the size of that loss
  • The tax benefit always depends on the investor’s own tax position, not on the size of the loss alone
  • A quantity surveyor, not an accountant, is qualified to assess the depreciation component
  • Older and renovated properties can still generate meaningful depreciation deductions

What Negative Gearing Means for an Investment Property

Negative gearing describes what happens when the deductible costs of holding an investment property exceed the rental income it earns. The ATO allows that shortfall, the net rental loss, to be offset against an investor’s other assessable income, such as salary or wages, reducing their overall tax bill for the year.

Loan interest, council rates, property management fees, landlord insurance and eligible repairs typically make up that shortfall. This is a normal, legitimate feature of the tax system rather than a loophole, and it applies to any income-producing asset held at a loss, not just property.

What makes property distinct is the range of deductible costs involved, and one of those costs behaves quite differently from the rest.

Where Depreciation Fits Into the Calculation

Depreciation is the non-cash side of a negative gearing position, reducing taxable income without the investor spending anything in the year it is claimed. Loan interest and rates are cash costs that have actually left the investor’s account, but depreciation reflects the declining value of the building and its fixed assets over time.

This is the part of negative gearing investors most often underestimate. Getting a property tax depreciation claim right can meaningfully increase the net loss, which increases the tax benefit without changing the cash the investor puts into the property each year. Skipping it, or estimating it instead of engaging a specialist, generally means understating a legitimate deduction.

Understanding how much a specific property can claim requires a proper assessment rather than a rule of thumb, since construction cost, age and the assets present all affect the outcome.

Why the Benefit Depends on Your Tax Position

The same net rental loss from negative gearing does not produce the same tax benefit for every investor. Australia’s tax system is progressive, so each dollar of taxable income is taxed at a different rate depending on total income for the year, and the value of a deduction rises or falls with that rate.

An investor with a higher income receives a larger tax benefit from an identical property loss than an investor on a lower income, since the deduction offsets income that would otherwise be taxed more heavily. The property itself has not changed between these two scenarios, only the investor’s own tax position has.

This also means the benefit is personal, not something a general article can calculate for any individual investor. A registered tax adviser can confirm the specific outcome for a given income and property.

What a Depreciation Schedule Actually Adds

Claiming this deduction accurately relies on a proper depreciation schedule, which sets out exactly what an investment property and its assets are worth as an annual tax deduction, split into two categories the ATO treats differently.

Division 43 capital works covers the building structure itself: walls, floors, roofing and other fixed elements. These deductions are spread over a long period, generally decades, because the structure itself has a long effective life.

Division 40 plant and equipment covers removable assets such as carpets, appliances and air conditioning, which wear out faster and typically produce higher deductions in the earlier years of ownership.

The rules here changed in May 2017. Investors who purchased a second-hand property after that date can generally only claim depreciation on plant and equipment they installed themselves, rather than assets already in the property when they bought it.

A quantity surveyor is the professional the ATO recognises as qualified to prepare this assessment, since it requires construction cost expertise an accountant does not typically hold. The result is an ATO-compliant depreciation report that identifies exactly what is claimable, rather than leaving the investor to guess.

Older Properties, Renovations and Negative Gearing

Newer properties tend to produce larger depreciation deductions, since more of the original construction cost sits within the claimable period and the assets themselves are newer. That doesn’t mean an older property is not worth assessing. Loan interest and holding costs remain deductible regardless of the property’s age.

Renovations can change this picture significantly. Work completed after 1985 may qualify for Division 43 deductions regardless of when the property was originally built, so an upgraded kitchen, new flooring or an added bathroom can generate more claimable value than an investor expects from an older property.

A quantity surveyor can assess an older or renovated residential investment and clarify what is genuinely available to claim, rather than assuming an older property has little left to offer.

Common Misunderstandings About Negative Gearing and Depreciation

A few misconceptions come up repeatedly once investors start looking at negative gearing and depreciation together, and they are worth addressing directly before moving on to how ACP approaches a schedule.

  • “Depreciation only matters if the property is new.” Renovations, and even older buildings with post-1985 improvements, can still generate meaningful Division 43 deductions.
  • “A negatively geared property always loses money.” The loss is a tax outcome, not necessarily the full picture of the investment’s performance, particularly once capital growth is considered.
  • “An accountant can work out the depreciation component.” Accountants apply the figures a quantity surveyor provides; assessing construction costs is not typically part of their training.
  • “Depreciation stays the same every year.” The deduction generally declines as assets reach the end of their effective life, so the benefit is usually largest in the earlier years of ownership.

Working through these points with a qualified adviser generally uncovers more value than assuming the simplest version of the rule applies.

How ACP Supports Negatively Geared Investors

Getting the depreciation component right is where a professionally prepared schedule makes the most difference to a negatively geared property. ACP has prepared quantity surveying reports for residential and commercial investors across Australia for more than 35 years, covering more than 10,000 projects.

Every report carries AIQS certification and Tax Practitioners Board registration, the professional standards required for depreciation schedules to meet ATO requirements. The same team can also assist with cost estimates, insurance valuations and expert witness reports when needed.

Before a depreciation report leaves the office, it goes through the TAXBACK1000 quality assurance system. Fixed-fee pricing and a money-back guarantee provide cost clarity, with no unexpected charges.

Getting Reliable Numbers for Your Property

Every property produces a different outcome, since loan structure, rental yield, purchase price, construction date and the assets present all affect both the negative gearing position and the depreciation component. Generic figures or rules of thumb cannot replace an assessment specific to the property in question.

For an accurate figure based on your property, request a quote today, and the ACP team will be in touch.

Frequently Asked Questions

Does depreciation apply to a property that already has a tenant in place?

Depreciation is based on the property and its assets, not on how long a tenant has occupied it, so an established rental property is assessed the same way as a newly tenanted one. What matters is the construction date, asset age and what has been added or renovated since.

Can negative gearing apply if a property is vacant for part of the year?

A property can still be negatively geared even with some vacancy, since the calculation is based on the full year’s deductible costs against whatever rental income was actually earned. Extended vacancy simply widens the gap between costs and income for that year.

Does refinancing a property affect the negative gearing position?

Refinancing can change the loan interest component if the new loan amount or rate differs from the original, which flows through to the deductible cost side of the calculation. It does not affect the depreciation component, which is based on the property and its assets rather than the loan.

Is a new depreciation schedule needed if the ownership structure changes?

A change in ownership structure generally requires an updated schedule, since deductions are apportioned according to each owner’s share of the property. This ensures each owner claims the correct percentage rather than assuming an even split applies.

Does negative gearing affect borrowing capacity for a future purchase?

Lenders generally take rental income and holding costs into account when assessing borrowing capacity, so a negatively geared property can affect how much further lending is available. A mortgage broker can confirm how a specific lender treats an existing negatively geared property.