Rental Income and Negative Gearing

How rental income is taxed in Australia, the mechanics of negative gearing, Division 43 building depreciation, Division 40 plant and equipment, the second-hand asset restriction, interest deductibility, repairs versus improvements, and the announced (not yet legislated) 2027 quarantining proposal.

Negative gearing occurs when deductible expenses on a rental property exceed the rental income, producing a net rental loss that offsets other taxable income. Under current law (ITAA 1997 Division 36), there is no cap on how much rental loss can reduce salary, business, or other income in the same year. Division 43 allows a 2.5% annual deduction on eligible building construction costs for properties built after 15 September 1987, while Division 40 covers plant and equipment depreciation, subject to the second-hand asset restriction that took effect 9 May 2017.

Last reviewed: 27 May 2026

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How rental income is reported

All rental income is assessable and must be declared in the rental schedule of your individual tax return. Each owner declares income and claims expenses based on their legal ownership percentage, not who physically collected the rent or paid the bills. Assessable rental income includes ordinary rent received, rental bond money you are entitled to retain, and insurance payouts connected with the rental property.

Deductible rental expenses

The ATO allows deductions for expenses incurred in earning rental income. The most significant deduction for negatively geared investors is interest on borrowings, which is fully deductible against rental income with no annual cap. Other common deductions include council and water rates, land tax, property management fees, building and landlord insurance, strata or body corporate fees, pest control, cleaning, gardening, and tenant-related legal expenses.

Repairs versus improvements

Repairs that restore something to its original condition are deductible immediately. Improvements, alterations, and renovations are capital in nature and generally fall under Division 43 capital works (2.5% per year) or Division 40 plant depreciation rather than an immediate deduction. Structural improvements that go beyond original condition are capital works claimed over time.

Travel restriction (from 1 July 2017)

Travel to inspect or manage a residential rental property is not deductible under s 26-47 ITAA 1997, unless a specific exception applies (such as carrying on a business of property letting). This restriction applies regardless of whether you self-manage or use an agent.

How negative gearing works

Negative gearing produces a rental loss when deductible expenses exceed rental income. Under ITAA 1997 Division 36, that loss reduces your other assessable income in the same year. The tax benefit is the rental loss multiplied by your marginal tax rate.

Division 43: capital works deductions

Division 43 of the ITAA 1997 allows a 2.5% annual deduction on eligible construction costs for residential buildings constructed after 15 September 1987. The deduction is based on the original construction cost, not the market value or purchase price of the property. For a building that cost $400,000 to construct, the annual Division 43 claim is $10,000 per year for 40 years.

Establishing construction cost

A quantity surveyor depreciation schedule is the standard method for establishing the original construction cost. The ATO expects verifiable evidence, particularly where the property has changed hands. The schedule cost ($500 to $800 typically) is itself a deductible expense.

Division 40: plant and equipment depreciation

Division 40 covers depreciable assets within a rental property, such as carpets, blinds, hot water systems, air conditioning units, and appliances. Each asset is depreciated over its effective life using either the prime cost or diminishing value method.

CGT when you sell a rental property

On disposal, the cost base includes the purchase price and incidental acquisition and disposal costs. Division 43 deductions already claimed reduce the cost base (known as the 'Division 43 cost base reduction'). Interest deductions do not reduce the cost base, as interest is an annual deduction rather than a cost base element. The 50% CGT discount applies if the property was held for more than 12 months.

Former main residence (6-year absence rule)

If the rental property was previously your main residence, the 6-year absence rule under Subdivision 118-B ITAA 1997 may preserve a full or partial main residence exemption for up to 6 years after you move out, provided you do not nominate another dwelling as your main residence during that period.

Proposed negative gearing quarantining (announced, not yet law)

The Australian Government announced a proposal to quarantine negative gearing losses so they can only offset other rental income, not salary, wages, or business income. The measure is linked to a start date from 2027 onwards. As at May 2026, no legislation has been introduced to Parliament. Until a bill passes both houses and receives Royal Assent, the current rules allowing full offset against all assessable income remain in force. Investors should monitor legislative progress but should not make decisions based on a measure that has not been enacted.

Key legislation and ATO guidance

ITAA 1997 Division 36 governs the deductibility of rental income and losses. Division 43 covers capital works deductions at 2.5% per year. Division 40 covers plant and equipment depreciation. Section 26-47 restricts travel deductions for residential rental property from 1 July 2017. Section 40-27 restricts second-hand depreciation claims from 9 May 2017. The ATO rental properties guide and capital works guide provide practical application guidance.

Statute references

ITAA 1997 Division 36 (rental income and loss deductions)
ITAA 1997 Division 40 (plant and equipment depreciation)
ITAA 1997 Division 43 (capital works deductions, 2.5% rate)
ITAA 1997 s 26-47 (travel expense restriction from 1 July 2017)
ITAA 1997 s 40-27 (second-hand depreciation restriction from 9 May 2017)
ITAA 1997 Subdivision 118-B (main residence CGT exemption and 6-year absence rule)

Frequently asked questions

How does negative gearing reduce my tax bill?+

When your deductible rental expenses (interest, rates, insurance, depreciation, management fees) exceed the rent you receive, the shortfall is a net rental loss. That loss is deducted from your other assessable income (salary, business income, dividends), reducing your total taxable income and therefore your tax payable. The tax benefit equals the rental loss multiplied by your marginal tax rate.

Do I need a quantity surveyor report to claim depreciation?+

For Division 43 capital works deductions, the ATO requires evidence of the original construction cost. A quantity surveyor depreciation schedule is the standard way to establish this cost and identify Division 40 plant items. The schedule typically costs $500 to $800, and the cost of the schedule itself is tax deductible.

What is the initial repair trap?+

If you fix defects that existed when you purchased the property, the ATO treats those costs as capital expenditure, not an immediate repair deduction. This applies regardless of whether you knew about the defect at purchase. Only repairs for damage that occurs during your ownership period qualify as immediate deductions under general repair principles.

Will negative gearing be quarantined from 2027?+

The Australian Government announced a proposal to quarantine negative gearing losses so they can only offset rental income (not salary or business income) from a future date linked to 2027. As at May 2026, this measure has not been legislated. Until legislation passes both houses, the current rules allowing full offset against all assessable income remain in force.

Last reviewed: 27 May 2026