Negative gearing and tax depreciation are linked, but they are not the same. Negative gearing is a tax result that happens when claimable costs are higher than rental income.
One claim is tax depreciation which adds to those costs. It covers wear and tear on a property and its assets. Negative gearing is the result of that difference, while depreciation is one tax deduction that may help create it.
What Is Negative Gearing?
Negative gearing means an investment property’s deductible expenses are higher than its rental income.
This creates a taxable loss. That loss may reduce the investor’s taxable income at tax time by offsetting salary, business income or other taxable income, which can reduce their overall tax liability.
Common deductible expenses include:
loan interest
council rates
landlord insurance
property management fees
repairs and maintenance
tax depreciation
Negative gearing does not mean the property is cash flow positive. The investor may still need to pay the shortfall. Many property investors accept this when they expect capital growth over time. It often benefits higher-income investors more and is not suitable for everyone.
Example calculation | Amount |
|---|---|
Rental income | $30,000 |
Loan interest | $25,000 |
Council rates | $2,500 |
Landlord insurance | $1,500 |
Property management fees | $3,000 |
Repairs and maintenance | $2,000 |
Tax depreciation | $4,000 |
Total deductible expenses | $38,000 |
Net taxable loss | $8,000 |
What Is Tax Depreciation?
Tax depreciation is a claim for the fall in value of the different parts of an investment property like carpets and floors.
Buildings, fixtures and assets lose value with age and use. This is wear and tear.
Rather than claim the full cost at once, investors often claim depreciation over many financial years under current rules.
A tax depreciation schedule lists these claims. A qualified quantity surveyor prepares the report. It shows what the investor may claim each year.
Depreciation can reduce taxable income. It may also improve after-tax cash flow. Since it is a non-cash deduction, the investor does not need to spend that amount again in the same year.
Depreciation category | What it covers | Examples |
|---|---|---|
Capital works deductions | Building structure and fixed items | Walls, floors, roof, built-in cupboards |
Plant and equipment depreciation | Removable or mechanical assets | Carpet, blinds, ovens, dishwashers |
Negative Gearing vs Depreciation: What Is the Difference?
Negative gearing is the tax result when deductible property expenses exceed rental income.
Depreciation is one tax deduction that may add to those costs.
Key differences include:
Negative gearing: A tax result when claimable costs are higher than rental income.
Tax depreciation: A claim for the fall in value of eligible building works and assets.
Cash expenses: Costs paid during the year, such as loan interest and council rates.
Non-cash deductions: Claims such as depreciation that may cut taxable income without a new cash payment.
Taxable loss: The loss that may grow when depreciation is added to other deductible expenses.
Does Depreciation Affect Negative Gearing?
Depreciation can affect negative gearing because it may increase a property’s deductible expenses and available tax deductions.
Tax depreciation can lift the total amount claimed, increasing total deductions and the tax benefits of negative gearing at tax time. This may increase the investor’s taxable loss.
This can make negative gearing more tax effective. But it is not the same as cash flow. A property can show a larger reported loss after depreciation, which may mean less tax or a lower tax bill, even though cash flow does not change.
Example calculation | Without depreciation | With depreciation |
|---|---|---|
Rental income | $30,000 | $30,000 |
Cash expenses | $35,000 | $35,000 |
Depreciation deductions | $0 | $6,000 |
Taxable loss | $5,000 | $11,000 |
Can Depreciation Make a Property Negatively Geared?
Depreciation can make a property negatively geared if cash costs are close to rental income.
It may move a property from a small taxable profit to a taxable loss when the property generates only a small surplus before depreciation. This can happen even though the investor has not paid that amount in cash during the year.
Depreciation can help property investors. But heavily negatively geared investments can create positive cash flow issues if an investor’s personal income is not enough to cover the shortfall until tax time. But it should not guide the whole property investment choice.
How Tax Depreciation Can Improve After-Tax Cash Flow
Tax depreciation can improve after-tax cash flow by reducing taxable income.
Unlike loan interest, council rates or property management fees, depreciation does not need a new payment in the same year.
This can help property investors in a few ways:
Negatively geared property: Depreciation may increase the taxable loss claimed on the tax return.
Positively geared property: Depreciation may reduce taxable profit and lower tax payable.
Tax time: A depreciation schedule can help find claims that may be missed.
Tax agent support: The schedule gives the investor’s registered tax agent the figures needed to claim depreciation.
This is why tax depreciation can affect cash flow and the overall tax result.
Why Depreciation Is Not the Same as Negative Gearing
Topic | Depreciation | Negative gearing |
|---|---|---|
What it is | A tax deduction for wear and tear on eligible works and assets | The tax result when expenses exceed rental income |
Role in tax return | May reduce taxable income or increase a rental property loss | May reduce the investor’s taxable income if the loss offsets other income |
Cash flow impact | Non-cash deduction, so it does not need a new payment that year | May still involve cash pressure from loan interest, rates, insurance and other costs |
Applies to | Eligible capital works and depreciating assets | The income and costs of the investment property |
Relationship | Can add to a larger taxable loss | May include depreciation as one of several deductible expenses |
Positive gearing impact | Can reduce taxable profit on a positively geared property | Does not apply if rental income exceeds deductible expenses |
Investor takeaway | Depreciation is one deduction in the tax calculation | Negative gearing is the final tax position after income and deductions are counted |
Why a Depreciation Schedule Matters for Negative Gearing
A depreciation schedule helps property investors find deductions they may be able to claim.
This matters because depreciation can change the property’s tax result. It’s worth noting that the proposed changes to negative gearing laws may cap deductions and reduce the current-year benefit of non-cash depreciation losses.
For a negatively geared property, it may increase the taxable loss. For a positively geared property, it may reduce taxable profit. Such changes could alter the financial viability of some negative gearing strategy decisions.
A qualified quantity surveyor prepares the schedule. They check eligible capital works deductions and depreciating assets.
The report gives the investor’s registered tax agent the figures needed at tax time.
A depreciation schedule can be useful for investors who:
own a rental property built after 15 September 1987
have completed renovations or capital improvements
purchased a new or recently built investment property
own a property with eligible plant and equipment
want clearer records for tax time
need support from a registered tax agent
Final Insights on Negative Gearing vs Depreciation for Property Investors
Depreciation can affect negative gearing, but it is not the same thing.
Negative gearing is the final tax result when deductible expenses exceed rental income.
Tax depreciation is one deduction that may increase those expenses and reduce taxable income.
This strategy should look at cash flow, borrowing capacity, market conditions and long-term capital growth, and it is worth seeking professional advice when weighing those factors.
Investors should also consider how depreciation claims reduce the cost base of their property, which may increase capital gains tax payable when they sell.
FAQs About Depreciation and Negative Gearing
Is depreciation part of negative gearing?
Yes, depreciation can form part of the deductible expenses used to work out if a rental property is negatively geared.
But depreciation is only one deduction. Negative gearing happens when total deductible property expenses exceed rental income.
Can depreciation make a property negatively geared?
Yes, depreciation can make a property negatively geared if deductible expenses are close to rental income.
Does depreciation improve cash flow?
Depreciation can improve after-tax cash flow by reducing taxable income or tax payable.
But it does not change real cash expenses. These include loan interest, council rates, insurance and property management fees.
Do I need a depreciation schedule for negative gearing?
You do not need a depreciation schedule to have a negatively geared property.
However, a depreciation schedule or depreciation report can help identify eligible deductions and claim depreciation correctly. These may increase a taxable loss or reduce taxable profit.
Is tax depreciation the same as a tax refund?
No, tax depreciation is a deduction, not a direct refund.
It may reduce taxable income. This can reduce tax payable or increase a tax refund, based on the investor’s marginal tax rate, other income and overall tax position.
