Property

Negative Gearing and Investment Property Tax

Getting the annual rental schedule right — income, deductible expenses, interest apportionment and depreciation — on properties held as investments.

Holding phase
Deductions while owned
Interest apportioned
On a defensible basis
Per property
Separate schedules
Suburban house held as an investment property

Negative gearing is not a strategy so much as a description. A property is negatively geared when the deductible costs of holding it exceed the rental income it produces, and the resulting loss is offset against other income. Whether that is a good position to be in depends entirely on what is happening to the value of the asset and on the owner’s own circumstances — which is a financial advice question, not a tax one.

What we deal with is the annual tax treatment. That means a rental schedule that correctly separates immediately deductible repairs from capital improvements that are not, apportions interest where a loan has been redrawn or partly used for private purposes, applies depreciation and capital works correctly, and pro-rates everything where the property was only available for rent for part of the year.

What’s included

What the rental schedule covers

  • Rental incomeRent received, plus any other amounts related to the property that form part of assessable income for the year.
  • Repairs versus improvementsDistinguishing work that is immediately deductible from work that is capital in nature and must be treated differently.
  • Interest apportionmentWhere a loan has been redrawn, refinanced or used partly for private purposes, apportioning interest on a defensible basis.
  • Depreciation and capital worksApplying depreciation on plant and equipment and capital works deductions, generally from a quantity surveyor’s schedule.
  • Part-year and part-usePro-rating where the property was purchased, sold, or genuinely available for rent for only part of the year.
  • Co-ownership splitsAllocating income and deductions between owners according to their legal interests rather than whichever split is convenient.
Rental property interior ready for tenants
Who it’s for

Who this suits

First-time investors. Where the first full year of ownership needs to be set up correctly, since the treatment established now carries forward.

Owners of multiple properties. Where several schedules, several loans and several depreciation schedules have to stay straight and consistent.

Owners with a mixed-use loan. Where a loan has been redrawn or refinanced and the interest deduction needs a defensible apportionment.

Process

How the schedule is prepared

1

Collect the records

Agent statements, loan statements, rates and insurance notices, invoices for work done, and any depreciation schedule.

2

Classify expenditure

Each item is classified as immediately deductible, capital works, depreciable or non-deductible — the classification does the real work.

3

Apportion

Interest, part-year ownership and any private use are apportioned on a basis that is documented and can be explained.

4

Prepare and retain

The schedule is prepared for inclusion in the return, with working papers kept in case the ATO asks about a claim.

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What this page covers — and what sits elsewhere

Rental property deductions are an area the ATO reviews actively, so the working papers matter as much as the numbers. Note that the deductions covered here apply while the property is held — the tax consequences of selling it are a separate calculation under capital gains tax, and the schedule itself lands in the owner’s return prepared under taxation services.

Related services

Works well with

Capital Gains TaxWhat happens on sale — and why keeping improvement records during ownership matters years later.Read more Taxation ServicesThe individual return the rental schedule forms part of each year.Read more Cash Flow ManagementWhere a portfolio of geared property has to be funded month to month regardless of the tax outcome.Read more

View all accounting services

Questions

Common questions

Is negative gearing a good idea?
That is a personal financial decision, not a tax one, and it is outside what we are licensed to advise on. It depends on your income, your other assets, your tolerance for risk and your view on the property market — none of which a tax return tells us. A licensed financial adviser is the right person for that question. What we can do is make sure the tax treatment of a property you already hold is correct.
Can I claim the full cost of renovating between tenants?
Not necessarily. Work that restores something to its original condition is treated very differently from work that improves or replaces an asset, and the second category is generally capital rather than immediately deductible. Getting this classification wrong is one of the most common errors in rental schedules, so invoices that describe the work in detail are genuinely useful.
Do I need a depreciation schedule from a quantity surveyor?
For many properties it is the practical way to substantiate depreciation and capital works deductions, because it provides an evidenced basis for the amounts claimed. Whether it is worthwhile depends on the age and construction history of the property. It is a cost that often pays for itself, but not in every case, and we will say when we think it will not.

Speak to a chartered accountant

Tell us what you need and we’ll let you know whether we can help, what it involves and what it costs — before you commit to anything.

General information only. This page describes services provided by DKD Accounting and is general in nature. It does not take account of your objectives, financial situation or needs, and it is not tax, legal or financial product advice. Rates, thresholds and caps change — always confirm current figures with the ATO or speak to us about your circumstances.
Source: ATO — Residential rental properties · ATO — Capital gains tax