Negative gearing and tax benefits for investors explained

With Canberra's median house price hovering around $835,000 and rental yields under pressure, investors are increasingly turning to negative gearing to sweeten the tax equation. But how does it work, and is it right for your portfolio?

Negative gearing occurs when your investment property's costs—mortgage interest, rates, insurance, and maintenance—exceed rental income. In Australia's tax system, that annual loss can be deducted against your other income, potentially lowering your overall tax bill. For a public servant earning $90,000 and carrying a $50,000 annual shortfall on an investment property, that could translate to a $15,000–$20,000 tax refund, depending on the marginal rate.

Canberra investors snapping up properties in Gungahlin and Belconnen are particularly attracted to this benefit. A two-bedroom townhouse in Harrison or a villa in Ngunnawal might yield $400–$450 weekly, but after a $650,000 mortgage at today's rates, rates of $2,000 annually, and maintenance reserves, the loss mounts quickly. That loss is tax-deductible.

Depreciation claims amplify the advantage. Even though a rental property isn't physically deteriorating faster, the ATO allows investors to claim the building's declining value and appliance wear over time. A post-2000 residential property can yield $3,000–$5,000 in annual depreciation deductions—real tax relief with no cash outlay.

The trap is obvious: you're banking on capital growth to offset years of cash-flow pain. If property values stagnate—as happened in parts of Belconnen between 2017 and 2020—you're left nursing losses without future gains. Interest-rate hikes also compress margins brutally. A 1 per cent rate rise on a $650,000 mortgage adds $6,500 annually to your costs.

The government has tightened negative gearing's appeal in recent years. From 2024, new investors cannot claim depreciation on buildings acquired after March 2025, though existing investors retain grandfathering. This has already shifted strategy toward older stock in suburbs like Forrest and Yarralumla, where depreciation claims remain available.

Tax Commissioner guidance is also stricter: if your rental property shows losses year after year with no realistic path to profit, the ATO may challenge your deductions, arguing the property is a personal investment rather than a business.

For Canberra's first-home buyers, negative gearing underscores a hard truth: while investors leverage tax policy to subsidise their holdings, owner-occupiers building equity receive no equivalent relief. As clearance rates hold near 65 per cent, the math increasingly favours investors—but only if they can weather the storm.

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