Negative gearing and depreciation: how tax rules treat a rental property

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Kooky

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Few phrases in Australian property are used as often, or explained as rarely, as negative gearing. It is not a scheme or a product. It is the name for an ordinary result on a tax return: a rental property that costs its owner more in a year than it brings in. Depreciation, its usual companion, is not a payment at all. It is an allowance for the wearing out of a building and the things inside it. Between them, the two ideas decide how much tax most property investors pay.

They have also just been rewritten. On 26 June 2026 the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received royal assent. From 1 July 2027 it limits negative gearing on residential property to new builds, while leaving alone the homes investors already owned on Budget night. Anyone who owns a Queensland rental, or is thinking of buying one, now has to understand two sets of rules: the ones that apply to the return they are about to lodge, and the ones that begin in a year.

This guide sets out both, taking the rules only from what the Australian Taxation Office publishes: its guidance pages for residential rental properties as they stand in late July 2026, and its page on the new law, with the Budget papers quoted where the ATO's summary is brief. It explains what counts as rental income and expense, how interest is treated, how the building and its fittings are written off, why new properties produce larger deductions than old ones, and what changes in 2027. A worked example with invented figures shows how the pieces fit. It is a description of general rules. A person's own position depends on their income, loans and ownership, and that is the work of a registered tax agent.

ATO, Tax reform: reforming negative gearing and capital gains tax, updated 29 June 2026; ATO guidance on capital works deductions, updated 21 May 2026.

What negative gearing means in the ATO's terms

A property is geared when it is bought with borrowed money. It is negatively geared when the deductible costs of holding it, including the interest on that loan, come to more than the rent. The owner has a net rental loss for the year.

The ATO's page on claiming rental expenses, updated on 23 July 2026, states what happens next under the rules that apply to the returns now being lodged: when deductions exceed income, the loss offsets the owner's other income, or is carried forward to future years. Other income, for most people, means a wage or salary. A loss of $10,000 on a rental reduces the income on which tax is worked out by $10,000.

There is no special negative gearing deduction and no box of that name on the return. The loss arises from ordinary deductions.

It is common. The ATO's Taxation statistics for 2023-24, published on 17 June 2026, count 2,335,540 individuals with an interest in a rental property, of whom 1,266,454 reported a net rent loss. That is 54.2 per cent. Across everyone who reported a net rent figure, the average was a loss of $1,148.

The same ATO page carries a line added after the Budget: the 2026-27 Budget changes do not apply to 2025-26 tax returns. For the return covering the year to 30 June 2026, nothing is different.

The three kinds of rental expense

The starting point is the rent, and the ATO's guidance for people about to buy a rental property lists what must be reported: payments from tenants, including cash; bond money kept, for instance to cover damage; and insurance payouts or other reimbursements for amounts claimed.

Against that income, the ATO sorts expenses into three groups. The group an expense falls into decides whether it reduces this year's income, the income of several years, or none at all.

Some costs that feel like expenses are in the third group because they are part of buying the asset. The ATO's pre-purchase guidance names the amount borrowed itself, stamp duty and the legal or conveyancing fees on the purchase. They cannot be claimed against rent. They may instead be counted in the property's cost base, the figure used to work out a capital gain or loss when it is eventually sold.

Borrowing expenses are in the middle group. Loan establishment fees, title search fees charged by the lender and lenders mortgage insurance are spread over five years, or over the term of the loan if that is shorter.

Repairs, maintenance and improvements

One distinction catches more owners than any other, and the ATO's guidance spells it out in three words.

A repair replaces or fixes something worn out or damaged through renting the property: a broken window, a failed hot water element. Maintenance prevents deterioration and keeps the home in a tenantable condition: repainting faded walls, servicing an air conditioner. Both are claimed in the year they are paid for, once the property is an established rental.

An improvement makes the property better than it was: a renovated bathroom, a new deck, an extension. That is capital spending. It is not claimed at once but written off over many years as capital works, or as a depreciating asset if it is a separate item.

There is a trap at the start. Initial repairs, meaning work to fix defects or damage that already existed when the property was bought, are treated as capital even though the work looks like a repair. The ATO's guidance says they cannot be claimed immediately and form part of the cost of acquiring the property, unless they qualify as capital works or depreciating assets.

Interest, usually the largest deduction

For an owner with a mortgage, interest is normally the biggest number on the rental schedule, and the ATO's page on interest expenses, updated on 21 May 2026, sets the conditions.

Interest can be claimed where the money borrowed was used to buy a rental property that is rented, or genuinely held to produce income, for the whole income year. It can also be claimed where the borrowing paid for depreciating assets for the rental, for deductible repairs, or for renovations and extensions. Interest prepaid up to twelve months ahead is covered, as is interest during a period when the property is temporarily uninhabitable while being repaired.

What matters is what the borrowed money was used for, not what the loan is secured against. The ATO lists the interest that cannot be claimed: for any period the property is used privately, however short; on any part of a loan used for private purchases such as a car; and on a loan for a new home to live in that produces no income, even if the rental property is the security.

Where a loan has been used partly for the rental and partly for something private, only a share of the interest is deductible, and the ATO gives the calculation: total interest, multiplied by the rental part of the loan divided by total borrowings. Repayments on a mixed loan are treated as reducing both parts in proportion for the life of the loan. An owner cannot choose to pay off the private part first. Redrawing money for a private purpose changes the ratio, and the deductible share has to be recalculated from that point. The ATO's detailed ruling on mixed accounts is TR 2000/2.

The principal is never deductible.

Writing off the building: capital works

Depreciation comes in two parts, and the first concerns the structure. The ATO calls it the capital works deduction.

Its page on capital expenses, updated on 21 May 2026, gives two schedules: 2.5 per cent of the construction cost a year for 40 years, which is the standard rate, and 4 per cent a year for 25 years. To qualify, the property must have been built after 17 July 1985, and it must be rented or genuinely available for rent on commercial terms. Construction has to be finished before a deduction is claimed.

The deduction is based on what it cost to build, not on what the investor paid for the property. Land is not part of it. The ATO's list of what counts includes building and construction costs, alterations, major renovations to a room, substantial renovations, a fence, extensions such as a garage or patio, and structural improvements such as a driveway or retaining wall. Architects', engineers' and surveyors' fees are included. The total claimed over the years cannot exceed the construction expenses.

This is where the purchase of an existing home differs from building one. The buyer of a ten-year-old townhouse does not know from the contract what the builder spent. The ATO recommends, on its depreciating assets page, obtaining a quantity surveyor's report at purchase, and it requires owners to keep records showing how each deduction was worked out.

The practical consequence is a deduction that involves no spending in the year it is claimed. On a construction cost of $300,000, the 2.5 per cent rate gives $7,500 a year.

Writing off the fittings: depreciating assets

The second part concerns the things that are not part of the structure. The ATO describes depreciating assets as items that can be described as plant and do not form part of the premises: separately identifiable, not permanent, expected to be replaced within a relatively short time. Its examples are appliances, furniture, carpets and curtains.

Each such asset loses value over its effective life, and the loss in a year, the decline in value, is the deduction. The decline starts when the asset is first used or installed ready for use. The owner may use the effective life the Commissioner has determined or make a reasonable estimate of their own.

Two shortcuts apply to cheaper items. An asset costing $300 or less can be written off in full in the year it is first used, although items bought together as a set cannot be split to get under the limit. Assets valued at less than $1,000 can be grouped in a low-value pool and depreciated together.

For everything else there is a choice of two methods, and the ATO gives the formulas. The prime cost method spreads the cost evenly: the cost, multiplied by the days held over 365, multiplied by 100 per cent over the effective life. The diminishing value method front-loads it: the same calculation with 200 per cent in place of 100. The ATO's own example is an outdoor table costing $1,500 with an effective life of five years, held for a full year.

Prime cost gives the same amount every year. Diminishing value gives more at the beginning and less later.

Why a new property produces larger deductions

Since 2017 there has been a sharp difference between new and existing homes, and it has nothing to do with this year's Budget.

The ATO's guidance says that in most cases a deduction cannot be claimed for second-hand depreciating assets after 1 July 2017; its page on claiming expenses puts the cut-off at assets purchased after 9 May 2017. The oven, carpets and blinds that come with an existing house are second-hand in the buyer's hands. Their decline in value is, in most cases, not deductible.

New assets are treated differently. A deduction is available if no one has previously claimed depreciation on the asset and either no one has lived in the property or the investor acquired it within six months of its being newly built or substantially renovated. The buyer of a new apartment can depreciate the fittings that came with it. So can the owner of an old house who buys a new dishwasher for it: that asset is new.

Capital works are not subject to the second-hand rule. They depend on when the building was constructed. An existing home built after 17 July 1985 can still qualify. A house built before that date does not qualify for its original construction, though the ATO's list of capital works includes later alterations, extensions and substantial renovations.

Put together, a new property has the full construction cost to write off, at the start of its 40 years, and new fittings to depreciate. An older one may have a smaller building claim, or none, and usually no claim for its existing fittings. The gap in annual deductions can be many thousands of dollars.

A worked example with invented figures

The example below is an illustration, not market data. Every figure is an assumption chosen to make the arithmetic easy to follow.

Assume a new unit rented for the whole year at $650 a week, giving $33,800. The owner has an interest-only loan of $560,000 at 6.2 per cent, so interest is $34,720. Rates, body corporate levies, insurance and the agent's fees total $9,000. A quantity surveyor has put the construction cost at $300,000 and the first-year decline in value of the fittings at $2,500.

The owner is $9,920 out of pocket for the year: the rent of $33,800 less $43,720 in cash costs. The tax return shows a loss of $19,920, because $10,000 of the deductions involved no payment.

Under the rules that apply now, that loss comes off the owner's other income. If the owner pays tax on the top part of their salary at 30 cents in the dollar, an assumption made only for the example and leaving the Medicare levy aside, tax falls by $5,976. The cost of holding the unit after tax is $9,920 less $5,976, which is $3,944 for the year, or about $76 a week.

The example also shows why the phrase "making a loss to save tax" misleads. The owner is still $3,944 worse off in cash. Negative gearing reduces the cost of a shortfall. It does not turn it into a gain. The investment only succeeds if the rent grows or the property rises in value by more than the accumulated cost.

What the 2026 law changes from 1 July 2027

The ATO's page on the reform, updated on 29 June 2026, describes the measures as now law. They were announced in the 2026-27 Budget on 12 May 2026 and apply from 1 July 2027.

The change to negative gearing is stated in one line: it is limited, for residential property investments, to new builds. The ATO sets out the main protection just as briefly. Properties held at the time of the announcement, 7.30pm Australian Eastern Standard Time on 12 May 2026, are exempt from the change. The reforms affect individuals, trusts and partnerships.

The Budget papers describe what the limit means for a property that is caught: losses can be deducted against rental income only, and what cannot be used is carried forward.

Return to the worked example. As a new build, the unit keeps its treatment after 1 July 2027 and the arithmetic is unchanged. Had it been an established unit bought after Budget night, two things would differ from 2027-28. The fittings, being second-hand, would generally carry no deduction, so the loss would be $17,420 instead of $19,920. And that loss would not reduce the tax on the owner's salary in that year. The owner would bear the full cash shortfall of $9,920, about $191 a week, and would carry the $17,420 forward to use when the property, or another rental, produced a profit.

The same Act changes capital gains tax, which is the other half of an investor's return. The ATO's summary is that the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax on capital gains, and that the change applies only to gains that accrue after 1 July 2027. The Budget papers add that investors in new builds may choose between the 50 per cent discount and the new arrangements.

Not every detail is settled. According to press and law firm reports of the bill's passage, the definition of a new build is to be set out in a further instrument, and the Government has said it will legislate again on jointly owned property that changes hands on death or divorce. The ATO's page is the place those details will appear.

When the full amount cannot be claimed

All of the deductions above assume a property rented, or genuinely available for rent, for the whole year and owned for nothing else. Where that is not so, the ATO requires the expenses to be apportioned. Its page on claiming expenses lists the situations: the property was rented for only part of the year; the owner used it personally; only part of it earns rent; the rent is below market rates; or the loan was also used for private purposes.

For time, the method is the days the property produced income plus the days it was genuinely available for rent, divided by the days it was owned in the year, applied to the expenses. Days when the property sat empty do not count as available unless it was actively advertised and offered on commercial terms.

For a room or a granny flat let within the owner's home, the method is by floor area: the area the tenant has exclusively, plus half of the shared areas, over the total. Where a part is let for part of the year, the two methods are combined.

A lower-than-market rent to family or friends has its own outcome. Deductions are limited to the rent actually received, so the arrangement produces neither a profit nor a loss.

Holiday homes are stricter again. The ATO's guidance says ownership and use expenses cannot be claimed unless the property is used, or held for use, mainly to produce rental income, and a ruling and two compliance guidelines issued on 20 May 2026 set out how it applies that test.

Expenses that relate only to the letting, such as an agent's commission or the cost of advertising for a tenant, need no apportionment.

Records, co-owners and the usual errors

The ATO's guidance for buyers says records must be kept from the time the property is bought until five years after it is sold, on paper or digitally. That is far longer than the life of most tenancies, and it covers the documents that matter most at sale: the purchase contract, the duty and legal costs that went into the cost base, and the surveyor's schedule.

Co-owners declare income and expenses according to their legal interest in the property. A couple who own a rental as joint tenants each report half, whoever pays the bills and whoever has the higher income. The split follows the title.

The points on which the ATO's pages are most insistent are the ones described above: claiming initial repairs or improvements as immediate deductions, claiming interest on the private part of a loan, claiming for periods when the property was not genuinely available, claiming depreciation on second-hand fittings, and splitting deductions between owners in a way the title does not support.

Negative gearing lowers the cost of a rental that loses money. It does not make the loss disappear, and from July 2027 it will depend on what was bought and when.

Kooky, from Shaka

Kooky edits Queensland Estate and builds Shaka, the payment router he made for Queensland property professionals. One payment comes in, and every agent, agency and party in the deal receives their signed share on closing date.

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