Calculators

Investment Property in Australia: Gearing, Yield and the Tax at the End

How negative gearing, depreciation, rental yield and the capital gains discount fit together, and the numbers that decide whether a property works.

10 min read · published 2026-09-12

Calculators in this guide

Yield and growth are the whole argument

Every investment property produces two returns: rental income and capital growth. Gross rental yield is annual rent divided by purchase price, and net yield subtracts the costs of holding it. Rates, insurance, strata, management, repairs and vacancy. In most Australian capital cities net yields sit well below mortgage rates, which is why so many investments run at a cash loss.

That loss is only rational if growth exceeds it. A property costing $5,000 a year after tax to hold and growing $30,000 a year is a good investment; the same property growing $3,000 a year is not, and the tax deduction does not change which of the two you own. The entire negative gearing debate reduces to whether the growth assumption is realistic.

High-yield properties in regional areas and low-yield properties in inner capitals are two different strategies, not better and worse versions of one. The first funds itself and grows slowly, the second costs money to hold and depends on growth. The mistake is buying the second while budgeting as though you bought the first.

What negative gearing does and does not do

When rent is less than interest plus expenses plus depreciation, the loss is deducted against your other income. The deduction is worth your marginal rate, so someone on 45% recovers nearly half the loss and someone on 30% recovers less than a third. The remainder is real money out of your pocket, every week.

The deduction never turns a loss into a profit. It reduces the cost of the loss, which only makes sense if you are being compensated by growth. Framing it as a tax strategy rather than a leveraged growth bet is how people end up funding a stagnant asset for years.

Two mechanical details matter. Only the interest portion of a repayment is deductible, so a principal and interest loan leaves a larger hole in your budget than the deduction suggests. And the refund arrives at lodgement unless you arrange a PAYG withholding variation, which spreads it across your pay packets instead of leaving you to fund the gap for a year.

Depreciation: the deduction that costs nothing now

A depreciation schedule prepared by a quantity surveyor sets out two categories: capital works, which is the structure itself, deducted at 2.5% a year for forty years where construction began after 17 September 1987; and plant and equipment, which covers appliances, carpets and blinds.

The rules changed for properties acquired after 9 May 2017: deductions for previously used plant and equipment are no longer available to subsequent owners, though items you buy new yourself still qualify. Capital works deductions were not affected, which is why newer properties still produce substantial schedules.

The catch arrives on sale. Capital works deductions reduce your cost base, which increases the capital gain. With the fifty per cent discount you effectively repay about half of what you claimed, so depreciation is a timing benefit plus a permanent partial saving. Well worth having, but not the free money it is sometimes sold as.

The capital gains discount and when you sell

Individuals who hold an asset for more than twelve months pay tax on only half the capital gain. The twelve months runs from contract date to contract date, so a sale at eleven months and three weeks is taxed on the entire gain. On a $200,000 gain at a 37% marginal rate, that timing is worth around $37,000.

Because the discounted gain is added to your other income, the year you sell matters almost as much as the holding period. Realising a large gain in a year of reduced income, parental leave, a career break, the first year of retirement, can move most of it into lower brackets. Investors with several properties sometimes stagger sales across financial years for exactly this reason.

Carried-forward capital losses are applied before the discount, not after. Applying them afterwards halves their value, and it is one of the more expensive errors in a do-it-yourself return.

The costs people forget

Stamp duty is the largest upfront cost after the deposit and is not deductible immediately. Land tax applies to investment property above a state threshold and is an ongoing annual cost that scales with holdings. It is the reason multiple properties in one state become progressively less attractive.

Lenders charge more for investment loans than owner-occupier loans, usually by a meaningful margin, and interest-only terms carry a further premium. Building insurance, landlord insurance, strata levies, property management at seven to nine per cent of rent, and periodic repairs all sit on top.

Vacancy is the assumption most often set to zero and most reliably wrong. Two to four weeks a year is realistic in most markets, and a single difficult tenancy can cost far more than that in lost rent, repairs and tribunal time.

Questions people ask

What is a good rental yield in Australia?
Gross yields of three to four per cent are typical in the major capitals, while regional markets often deliver five to seven. Net yield after costs is usually one to two percentage points lower. Whether a yield is good depends entirely on the growth you expect alongside it. A high yield with no growth and a low yield with strong growth can produce similar total returns.
Is negative gearing still worth it?
Only when capital growth exceeds the after-tax cost of holding the property. The deduction reduces the cost of a loss at your marginal rate; it never creates a profit. Higher earners get more from the same loss, which is why the strategy is structurally more attractive at the top brackets and marginal at lower ones.
Should I get a depreciation schedule?
For a property built after 1987, almost certainly. A schedule costs several hundred dollars, is itself deductible, and typically returns several thousand a year in deductions on a newer property. A quantity surveyor will tell you before you commit whether your property will generate enough to justify the fee.
How much capital gains tax will I pay when I sell?
The net gain, after costs and any carried-forward losses, is halved if you held the property more than twelve months, then added to your income and taxed at your marginal rates. Someone on the 37% rate effectively pays about 18.5% of the gain. Stamp duty, buying costs, selling costs and capital improvements all reduce the gain and are routinely forgotten.
Can I claim renovations as a deduction?
Not immediately if they are improvements. Replacing something broken with an equivalent is a repair and deductible in the year it occurs; upgrading to something better is capital and must be depreciated over time. Renovating before a property is first rented makes the whole cost capital, which is a common and expensive misunderstanding.
Do I pay land tax on an investment property?
In most states, yes, once the total unimproved land value of your holdings in that state exceeds a threshold. Your own home is generally exempt. Land tax is assessed per state, so holdings spread across states each get their own threshold. Which is part of why some investors buy interstate.

Sources

General information only, not personal advice. See the disclaimer. Read how this material is checked.