You go to work. Meanwhile, someone is paying down your asset. That is the basic logic of owning an investment property, and it is worth understanding clearly before you commit to it.
This post covers how rental income is taxed, what you can deduct, how capital gains treatment works, and what the real trade-offs look like. It is general information only. The numbers and rules discussed are drawn from current ATO guidance, which you should verify with a licensed adviser before acting.
How the Tax Side Works
The ATO treats rental income as part of your assessable income, which means it is generally taxed at your marginal tax rate for the relevant financial year. If you are earning $120,000 in salary and $20,000 in rent, the ATO adds those together and taxes the total.
The upside is the deduction list. You can claim a deduction now, in the income year you incur the expense, for items such as interest on loans, council rates, repairs and maintenance, and depreciating assets costing $300 or less. Structural improvements may be claimed over time through capital works deductions, often at 2.5% per year.
When your deductible expenses exceed your rental income, the property is negatively geared. Negative gearing occurs when you buy a rental property with borrowed funds and the rental income is less than the deductible expenses, including interest on the borrowings. The tax result is that a net rental loss arises. In that case, you may be able to claim a deduction for the full amount of rental expenses against your rental and other income, such as salary, wages or business income.
Depreciation is a non-cash deduction, which means you may reduce taxable income without physically spending additional money during the year. For a new build especially, a depreciation schedule prepared by a qualified quantity surveyor can add meaningful non-cash deductions to your position. That is a conversation for your accountant.
The Capital Gains Picture, and a Change Worth Knowing About
When you sell an investment property, any profit above your cost base is a capital gain and is added to your taxable income in that year.
There is a capital gains tax discount of 50% for Australian resident individuals who own an asset for 12 months or more. This means you pay tax on only half the net capital gain on that asset. Per the ATO (ato.gov.au), for an asset to qualify for the CGT discount you must own it for at least 12 months before the CGT event happens.
However, this is a rule that is changing. The 2026 Federal Budget announced major changes to Australia's capital gains tax system for investments held outside superannuation. Under the current system, individuals who hold an asset for more than 12 months generally only pay tax on 50% of their capital gain. Under the new proposed rules, the current 50% CGT discount would largely be replaced by an inflation indexation system from 1 July 2027.
The government drew a clean line: gains accrued before 1 July 2027 are protected under the old 50% discount. Only future growth is subject to the new rules. The legislation had not passed Parliament at the time of writing. Anyone considering a purchase or sale decision around this issue should get specific advice from a licensed tax adviser, as the detail is still evolving.
The Real Trade-offs
Negative gearing is a cash-flow-negative position by definition. Because negatively geared properties create short-term losses, investors must have sufficient disposable income or savings to manage repayments during interest rate fluctuations or vacancy periods. A tax deduction reduces your loss. It does not eliminate it.
Individuals in higher marginal tax brackets benefit more from rental loss deductions. Someone taxed at 45% receives greater tax savings per dollar of loss compared to someone taxed at 19%. If your marginal rate is lower, a positively geared property, one where rent comfortably exceeds costs, may suit you better.
Vacancy is the variable that most first-time investors underestimate. Rental income is only income when the property is tenanted and paying at market rates. An independent rental appraisal from a local property manager before you buy is worth more than any back-of-envelope yield calculation.
Other costs that erode return on paper include:
- Stamp duty on purchase (state-specific, no federal deduction)
- Property management fees (typically 7-10% of gross rent, though these are deductible)
- Land tax, which varies by state and by the total value of your holdings
- Insurance, rates, and body corporate fees where applicable
- Maintenance and repairs, which tend to rise as a property ages
None of these costs make the asset unworkable. They do mean the numbers need to stack up honestly before you commit.
A Worked Example
Consider a new house purchased for $700,000 in a regional city. Assume the independent rental appraisal comes in at $560 per week, or roughly $29,000 annually, and total deductible holding costs, including loan interest, rates, insurance, and property management, come to $38,000 per year. The property is negatively geared by approximately $9,000.
At a marginal tax rate of 37%, that $9,000 loss reduces the investor's tax bill by roughly $3,330 for the year. The actual cash shortfall after the tax benefit is closer to $5,670 annually, or around $109 per week. That is a real cost to carry.
If the investor sells after five years at $870,000, the capital gain before cost-base adjustments is $170,000. After the 50% CGT discount (under current rules as they stood at time of writing), the taxable portion is $85,000, which would be added to their assessable income in that year. The numbers change meaningfully if the proposed indexation rules apply to gains accrued after July 2027.
This example is illustrative only. It does not account for depreciation, stamp duty, selling costs, or individual tax circumstances. It is not a projection of any property's performance.
What to Do Next
If you are seriously considering an investment property, three practical steps tend to produce better outcomes:
- Get a clear picture of your borrowing capacity. Talk to a licensed mortgage broker, not a bank branch comparison. Your capacity as an investor can differ from your capacity as an owner-occupier, particularly if you already have a primary mortgage.
- Commission an independent rental appraisal for any property you are shortlisting. Do not rely on figures provided by a selling agent. A local property manager can give you realistic current vacancy rates and achievable weekly rents for that street and that property type.
- Sit down with a property-specialist accountant before you buy, not after. They can model your actual tax position, advise on the best ownership structure for your circumstances, and ensure you understand the implications of the current and proposed CGT rules.
If you would like to understand how EWC sources and coordinates investment properties, or how our finance referral process works, visit our services page or book a free call. For further reading, browse the insights blog.
General information only, not personal financial advice. Speak with a licensed adviser before acting.