Australia Negative Gearing Guide

the negative gearing in Australia for the property investors and the taxpayers. The guide covers: the negative gearing basics (the "borrowing to invest when the investment costs exceed the investment income") — the "negative gearing" occurs when the "costs of owning the investment" (the "interest on the loan, the maintenance, the council rates, the insurance") exceed the "income from the investment" (the "rental income, the dividends"); the "net loss" from the investment can be offset against the "other assessable income" (the "salary, the business income, the capital gains") to reduce the total tax liability; the property negative gearing (the "most common application in Australia") — the investor borrows the funds to purchase the "residential investment property" and claims the deductions for the "mortgage interest", the "property management fees", the "body corporate fees", the "council rates", the "land tax", the "insurance", the "repairs and the maintenance", and the "depreciation" (the "capital works deductions" and the "plant and equipment depreciation"); the net rental loss reduces the taxable income from the other sources; the negative gearing on the shares and the managed funds — the investor can also negatively gear the "shares" and the "managed funds" by borrowing the funds through the "margin loan" or the "investment loan" and claiming the "interest deductions" against the "dividend income" and the "distributions"; the net investment loss reduces the taxable income; the CGT implications (the "capital gain on the sale of the negatively geared asset") — the investor who sells the negatively geared property must pay the "CGT on the capital gain" at the time of the sale; the "50% CGT discount" (the "12-month holding period") applies to the Australian resident individuals; the net rental losses claimed over the holding period are "recouped" through the "higher capital gain" (the "CGT cost base is not reduced by the rental losses").

Rental Property Deductions for the Negatively Geared Property

Interest deductions: The "mortgage interest" on the loan used to purchase the rental property is deductible if the loan is "directly related to the rental property" and the "funds are used for the income-producing purpose". The interest on the "refinanced loan" (the "replacing the original loan") is also deductible up to the amount of the original loan. The "redraw" (the "drawing the additional funds for the private purpose") makes the portion of the interest non-deductible.
Depreciation deductions: The "capital works deduction" (the "Division 43") at the rate of 2.5% per year on the "construction cost" of the building (the "built after 1987"). The "plant and equipment depreciation" (the "Division 40") on the "fixtures and the fittings" (the "carpets, the blinds, the air conditioners, the kitchen appliances") at the "effective life" rates. The "quantity surveyor report" provides the "depreciation schedule" for the property.
Repairs and maintenance: The "immediate deduction" for the "repairs" (the "restoring the property to the previous condition" — the "fixing the leaking tap, the patching the roof") incurred in the "current year". The "capital improvements" (the "replacing the entire roof, the adding the deck") are not immediately deductible and must be claimed through the "depreciation" over the "effective life".

For the full list of the rental property deductions, see our Rental Property Expenses Guide →.

Negative Gearing and the CGT on the Sale

CGT cost base and the rental losses: The "rental losses" (the "negative gearing deductions") claimed during the holding period do NOT reduce the "CGT cost base" of the property. The investor receives the "dual benefit" — the "tax deduction for the losses" during the holding period AND the "full cost base" for the CGT calculation at the sale. This is the key advantage of the negative gearing in Australia.
50% CGT discount: The "Australian resident individual" who holds the property for "more than 12 months" qualifies for the "50% CGT discount". Only the "remaining 50% of the capital gain" is included in the assessable income. The "company" and the "non-resident" do not qualify for the 50% discount.
Main residence vs investment property: The "main residence" (the "family home") is "CGT-exempt" and cannot be negatively geared (the "no deductible interest" because the loan is for the "private purpose"). The investor who moves into the previously rented property may use the "6-year absence rule" to treat the former residence as the "main residence" for the CGT purposes while renting it out.

For the CGT rules and the 50% discount in detail, see our Capital Gains Tax Guide →.

Negative Gearing Limits and the ATO Rules

Non-commercial loss rules: The ATO may disallow the "negative gearing deductions" if the "non-commercial loss rules" apply. The rules apply to the "business activities" (the "primary production, the professional services") but generally do NOT apply to the "rental property" and the "investment activities". The investor in the "rental property" and the "shares" is exempt from the non-commercial loss rules.
Holiday home restrictions: The "holiday home" or the "vacant land" may not qualify for the full negative gearing deductions if the property is used for the "private purposes" (the "personal use" beyond the limited days). The ATO requires the "apportionment of the deductions" based on the "rental use days" vs the "private use days". The property must be "genuinely available for the rent" at the "market rates".
MLS income test impact: The "net rental loss" (the "negative gearing loss") is included in the "total net investment losses" for the "Medicare levy surcharge income test". The loss is "added back" to the taxable income to calculate the MLS income, which may push the taxpayer into the "higher MLS tier" and trigger the "MLS at 1% to 1.5%".

For the income tests and the MLS impact, see our Income Tests Guide →.