Using Negative Gearing And Depreciation On Off‑the‑Plan Investments

Off‑the‑plan investors need to think about three moving parts at once: negative gearing, depreciation and the 2026–27 tax reforms.

Negative gearing can still reduce tax for many new builds, and depreciation on brand‑new apartments is often very strong. But after the reforms, you cannot rely on tax refunds to rescue a weak, highly geared deal – particularly for established properties. Every decision should start with pre‑tax cashflow and survive at least a 3% interest rate rise, then treat any tax benefit as upside.

This guide gives you a decision‑grade framework you can use this week with your accountant and broker.

Off-the-plan investments combine property risk with powerful but complex tax settings.

1. The new rules: where off‑the‑plan still fits

1.1 Quick recap: how negative gearing works now

Negative gearing happens when your deductible property expenses – interest, non‑cash depreciation, strata, rates, property management, repairs – exceed your rental income.

• That net loss can usually be deducted against your wage or business income.
• Your after‑tax cashflow improves because the ATO is sharing part of the loss.

For example, if your investment property loses $8,000 a year and your marginal tax rate is 37% plus Medicare, you may get roughly $3,100 back at tax time. You’re still out of pocket ~$4,900, but it hurts less.

1.2 2026–27 negative gearing reforms – what changes

The 2026–27 Federal Budget reforms (Treasury Laws Amendment (Tax Reform No. 1) Bill 2026) do three big things for residential investors from 1 July 2027:

1. New established dwellings bought after 12 May 2026 generally lose wage‑offset negative gearing – rental losses are quarantined to rental income and capital gains.
2. Many new builds and existing investments are carved out and keep full negative gearing, at least under current draft rules.
3. Capital gains tax (CGT) settings tighten – replacing the 50% discount with CPI indexation plus a minimum 30% tax on capital gains for many investors.

CPA Australia has been clear: these rules are complex, revenue‑focused and increase the burden on small investors. But complexity doesn’t mean “no opportunity” – it just means you need cleaner modelling.

For detailed reform mechanics and timing, see our explainer on the Budget changes to negative gearing at /insights/new-budget-negative-gearing-negative-gearing-on-investment-properties.

1.3 Where off‑the‑plan apartments sit

Most off‑the‑plan investments are designed to qualify as “new residential dwellings”, which, under current proposals, generally:

• keep full negative gearing (losses can still offset wage and business income), and
• provide strong building depreciation (Division 43) and plant & equipment deductions (Division 40).

But there are traps:

• You must check the contract and developer status – some “almost new” stock may not qualify.
• If you buy a completed apartment that’s already been lived in, you may fall into the established property bucket with quarantined losses.

Action for this week: confirm with your accountant which bucket each current and proposed property falls into, using the Budget categories and your contract dates.

2. Depreciation on new apartments: where the deductions come from

2.1 Two main types of depreciation

For an off‑the‑plan apartment, you typically have:

1. Capital works deductions (Division 43)

   • 2.5% per year of the construction cost over 40 years.
   • Only on the building structure and some fixed assets.

2. Plant & equipment (Division 40)

   • Faster depreciation on carpets, blinds, appliances, aircon, lifts, etc.
   • Rates vary – often 10–30% per year depending on the asset.

A quantity surveyor prepares a tax depreciation schedule that breaks this down year by year.

2.2 Worked example: typical off‑the‑plan depreciation

Assume:

• Brand‑new Sydney unit in a mid‑rise block
• Purchase price: $800,000 (land + building + fixtures)
• Approximate construction and qualifying plant & equipment: $500,000

Indicative depreciation (illustrative only):

• Division 43: 2.5% × $400,000 (building portion) = $10,000 p.a.
• Division 40: say $6,000 p.a. for the first few years, then tapering.

So total first‑year depreciation could be $16,000. On a 37% marginal tax bracket:

• Potential tax saving: 37% × $16,000 ≈ $5,920.

That’s a big non‑cash deduction – and exactly why new apartments can look very attractive on an after‑tax basis.

But remember: lenders do not lend on tax deductions or refunds. They lend on pre‑tax cashflow.

2.3 Depreciation vs real cashflow

Depreciation does not change:

• your actual mortgage repayments,
• your actual strata, rates or insurance, or
• your rental income.

It only improves the after‑tax result. Under the post‑2027 settings, every new geared property should be viable before depreciation, then depreciation is the cream on top.

If you are considering debt recycling as well as property, see how the new rules change the bar in /insights/debt-recycling-after-negative-gearing-rule-changes.