How Does Depreciation Impact Negative Gearing?
When people talk about negative gearing, depreciation is often mentioned as a key factor — but it’s not always clearly explained.
Depreciation can significantly affect the tax outcome of a negatively geared property, and understanding how it works helps you see why some investments appear more tax-effective than others.
Let’s break down what depreciation is and how it impacts negative gearing in simple terms.
What Is Depreciation?
Depreciation is a tax deduction that reflects the wear and tear of certain parts of an investment property over time.
This can include things like the building structure (where eligible) and assets within the property such as appliances, flooring, and fittings.
Importantly, depreciation is a non-cash deduction — meaning you can claim it without actually paying money out of pocket during the year.
How Depreciation Fits Into Negative Gearing
Negative gearing occurs when the costs of owning an investment property are higher than the rental income it produces.
Depreciation is included as one of those deductible costs, even though it doesn’t affect your cash flow.
This means depreciation can increase the size of the tax-deductible loss without increasing the actual cash cost of holding the property.
Why Depreciation Can Improve the After-Tax Position
Because depreciation increases the deductible loss, it can reduce your taxable income further.
This may lead to a lower tax bill, which can improve the after-tax cost of holding a negatively geared property.
In practical terms, depreciation can make a property feel more affordable after tax — even though the cash flow position hasn’t changed.
Depreciation Doesn’t Eliminate the Loss
It’s important to be clear about what depreciation does and doesn’t do.
Depreciation does not turn a cash-loss property into a cash-positive one. You still need to fund the gap between rental income and expenses.
What depreciation does is reduce the tax impact of that loss, helping soften the financial effect.
Newer Properties Often Have Higher Depreciation
Depreciation benefits are often higher in newer properties.
This is because more of the building and its fixtures may be eligible for depreciation in the early years.
As a result, newer properties may appear more tax-effective from a negative gearing perspective — particularly in the early stages of ownership.
Depreciation Reduces Over Time
Depreciation deductions typically reduce as the property ages.
Over time, assets are fully depreciated and the deductible amount decreases. This means the tax benefit from depreciation is usually strongest in the early years.
This is another reason negative gearing benefits often change over time rather than staying constant.
Depreciation Needs to Be Properly Calculated
Depreciation claims must be calculated correctly and in line with tax rules.
This usually involves a depreciation schedule prepared by a qualified professional.
Tax professionals such as
The Accountants
can help ensure depreciation is claimed correctly and appropriately for your situation.
Finance Structure Still Matters
While depreciation affects tax outcomes, the finance structure behind the investment still determines affordability.
Interest rates, loan structure, and cash flow all play a role in whether negative gearing remains manageable.
Depreciation improves the after-tax outcome — but it doesn’t replace good loan structure.
How Chase Helps Investors Understand the Bigger Picture
Chase Douglas has extensive experience in mortgage lending and helps investors understand how loan structure, cash flow, and tax outcomes (including depreciation) work together.
Chase focuses on ensuring the finance side supports long-term strategy, not just short-term tax outcomes.
Should Depreciation Influence Your Investment Decision?
Depreciation can meaningfully improve the tax position of a negatively geared property — especially in the early years.
However, it should support a sound investment decision, not drive it on its own.
👉 Book a conversation with Chase Douglas to understand how investment lending, cash flow, and tax considerations like depreciation fit together for your situation.
The strongest strategies consider both tax efficiency and long-term sustainability.
