Ah, the great Aussie property myth: “I’m negatively geared and I get heaps back from the ATO.”
Let’s be honest: the ATO isn’t Santa. If you think they’re giving out “free money” and your investment strategy is based on getting “free money” from tax deductions, it might be time to step away from the Facebook property group chat.
Let’s unpack what’s actually happening with those interest and depreciation deductions.
1. Interest Deductions – The Art of Paying More to Get Less
If your loan interest and other deductible property expenses are higher than your rental income, you’re negatively geared. Sounds smart until you do the maths.
Let’s say your rental income is $25,000, and your interest and expenses hit $35,000. That’s a $10,000 hole in your wallet. Sure, you might get around $3,700 back at tax time but you have still lost $6,300. That tax refund is not profit. That’s damage control.
Let’s stop pretending interest deductions are some sort of financial hack. You’re paying real cash to run a loss. You are spending your own money and being partially reimbursed. You’re still out $10,000 and the ATO just makes it hurt a little less.
2. Depreciation – The ATO’s “Buy Now, Pay Later” Deal
Depreciation looks like a win. You get to claim for the building and its fittings without pulling out your wallet. These are non-cash deductions so they feel great with no spending, just a tax benefit.
But of course, the ATO doesn’t forget. When you sell the property, the ATO claws it back by reducing your cost base, which increases your capital gain.
That $50,000 you’ve claimed? It now inflates your gain when you sell and so does your tax bill. It’s not free money. It’s tax delayed but not tax avoided. It’s like getting a cashback today, only to find it quietly added to your invoice when you check out years later.
So, while your tax refund might look nice today, don’t spend it all in one place. The ATO has your forwarding address.
A Quick Reality Check
Yes, property usually appreciates over time. That capital growth can and should outweigh the costs you incur along the way. But don’t confuse capital growth with the value of deductions.
Your property is going up because of the market not because you claimed $4,000 in depreciation. Interest and depreciation help manage tax but they don’t make a poor investment profitable.
If you’re relying on your refund to justify the deal, that’s not strategy but that’s spin.