Australian Certified Accountants Pty Limited


Investment Property Tax Specialists


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Rental Properties

  The popular term “negative gearing” is often used to describe an investment in real estate.  Gearing is just another word for borrowing money and negative gearing is a euphemism for losing money.  In other words the rental income from the property is less than the expenses incurred (the largest of which is usually interest on money borrowed to purchase the property).  These losses are able to be claimed as a net deduction against other taxable income and for taxpayers who pay tax at the top marginal rate this is quite an attractive deal.  The expectation is that these income losses will be more than made up by the increasing value of the property over the medium to long term.

All investments should be carefully evaluated for both their income return as well as future capital gains.  Often an investment in property has a more than just an income objective.  For example, it may be a future residence for either the taxpayer or a family member.  Owning direct property is a very active type of investment and this suits some people more than others.  It is a good idea to consider a proper financial plan before embarking on any major investment.

 Some of the important aspects of property ownership to consider are:-

The availability of a deduction for capital works (or special building write-off).  This is an annual deduction (2.5% or 4.0%) that applies to all buildings where construction commenced after 18 July 1985.  It also applies to non-residential building commenced after 20 July 1982 and traveller accommodation commenced after 21 August 1979.

A deduction for the annual decline in other depreciating assets.  It is wise to engage the services of a Quantity Surveyor to assess the value of capital works and depreciating assets if this information cannot be substantiated from other sources.

The deductibility of interest paid depends upon the purpose for which funds were borrowed, not upon the property that is used as security for those borrowings.   The taxpayer who owns the property is able to claim any losses and they also bear any liability for net rental income and capital gains.   Individual marginal tax rates have fallen in recent years and from 1 July 2006 you will need to earn over $125,000 before you pay tax at the top rate of 48.5%.   Under certain circumstances, where a property has first been occupied as the taxpayer’s main residence, this exemption may extend into the period when the property is let out.  


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