Investment property tax implications & benefits

Reduce your tax bill with this popular investment strategy.

Negative gearing occurs when the annual expenses of owning a rental property exceed the income it generates. Imagine you buy an investment property for $500,000 and rent it out for $450 per week. Your annual rental income is $23,400. However, your expenses for the property, including mortgage interest, council rates, and property management fees, total $28,000 per year. This means you have a rental loss of $4,600.

With negative gearing , you can deduct this loss from your other income, such as your salary or wages. This reduces your taxable income and can result in a lower tax bill. However, following recent Federal Budget changes, this tax benefit is now exclusively available for newly built properties. If you buy an established property moving forward, rental losses can only be offset against your rental income, not your personal salary (though existing investments remain grandfathered).

Simple example: Let's say your annual income is $80,000 and you invest in a newly built property. By deducting the $4,600 rental loss from your salary, your taxable income becomes $75,400. This could potentially save you a significant amount in tax.

Important note: Negative gearing is a complex strategy and it's crucial to seek professional advice from a financial advisor or accountant before making any decisions.

Claim deductions for wear and tear on your investment property.

Think of depreciation as wear and tear on your investment property. Over time, things like carpets, appliances, and even the building itself lose value. You can claim a deduction for this decline in value, which can reduce your taxable income and your tax bill.

Simple example: You purchase a brand new investment property for $600,000. The construction cost of the apartment is $400,000. You can claim a capital works deduction of 2.5% of the construction cost each year for 40 years. This means you can deduct $10,000 per year (2.5% of $400,000) from your taxable income, reducing your tax bill.

Important note: Depreciation can be a valuable tax benefit for property investors. It's recommended to consult with a qualified quantity surveyor to get a detailed depreciation schedule for your property.

Understand the tax implications of selling your investment property.

Capital Gains Tax (CGT) is the tax you pay on the profit you make when you sell an asset, like an investment property.

Simple example: You buy a property for $600,000 and later sell it for $750,000. Your capital gain is $150,000. You will need to pay CGT on this profit.

Important note on recent changes: The proposed 2026 Federal Budget has introduced significant changes to how CGT is calculated, primarily shifting to a new cost base indexation method. From 1 July 2027, this new approach adjusts the property's original purchase price for inflation before calculating your taxable profit and applies a minimum 30% tax rate to the real capital gains.

Under these new rules, investors who purchase newly built properties will have the power to choose between using this new cost base indexation method or sticking with the traditional 50% CGT discount (for properties held longer than 12 months). However, investors purchasing established homes from July 2027 will be required to use the new index base method.

For a complete breakdown of these updates, read our guide on what the 2026 Federal Budget means for property investors. You can also find general CGT details on the ATO website, or talk to a tax specialist or accountant to understand exactly how these obligations apply to your situation.