After-tax cashflow. Why investors who model it pay less tax.

Investment property cashflow is usually quoted pre-tax. The agent's investment summary shows rental income minus expenses, with the bottom line typically negative ("negatively geared"). Most investors read the pre-tax bottom line and treat the property as a holding cost.

After-tax cashflow is different. It accounts for the tax saving (or tax cost) the property generates through depreciation deductions, interest deduction, and the lift to your overall income tax position. The after-tax bottom line is often substantially better than the pre-tax bottom line. For some investors, it is meaningfully positive when the pre-tax number is negative.

This post explains the difference, the components, and the maths that most investors do not model.

Pre-tax cashflow

The simple cashflow:

• Rental income (gross): $X per year
• Less property management fees: typically 7-9% of rent
• Less council rates: $X per year
• Less water rates: $X per year
• Less insurance: $1,800-3,500 per year
• Less repairs and maintenance: 5-12% of rent
• Less strata levies (if applicable): $4,000-12,000 per year
• Less interest on mortgage: $X per year
• Plus rental income increase due to CPI adjustments and market growth

The result is pre-tax cashflow. For a typical Australian negatively-geared property, the pre-tax number is negative by $5,000-25,000 per year.

After-tax cashflow

The after-tax calculation adds back the tax saving generated by the property.

For an Australian investor in the 32.5% or 37% marginal tax bracket:

Component 1: depreciation deductions

Depreciation is the decline in value of capital items in the property. The deductions are non-cash (no cash leaves the investor's bank account) but reduce taxable income.

Two types:

• Capital works depreciation (Division 43): the building structure itself, deductible at 2.5% per year over 40 years from build date
• Plant and equipment depreciation (Division 40): fittings, appliances, carpets, etc., deductible over their effective lives

For a 2010-built dwelling, capital works depreciation in 2026 might be $5,000-9,000 per year. Plant and equipment depreciation (for the buyer who installs the items themselves) might add $1,500-3,500.

Total depreciation: $6,500-12,500 per year for a typical property.

Tax saving at 37% marginal: $2,400-4,600 per year.

Component 2: interest deduction

Interest on the loan used to purchase the investment property is fully deductible against rental income (and against other income via the negative gearing mechanism).

For a $700,000 loan at 6.5%, annual interest is approximately $45,500. The deduction is the full $45,500.

This is already factored into the pre-tax cashflow calculation, but its tax-recoverable nature means the after-tax cost is lower than the pre-tax cost by your marginal tax rate.

Component 3: deductible expenses

Council rates, water, insurance, property management, repairs, depreciation, interest, and various other costs are deductible. The total deductible expenses for a typical property are $50,000-80,000 per year.

If you are negatively geared (deductions exceed rental income), the excess deduction reduces your other income. At 37% marginal tax, every $1,000 of excess deduction saves $370 in tax.

Worked example

A 2010-built apartment in Brisbane, purchased for $650,000 in 2024 with $520,000 borrowed at 6.5%:

Pre-tax cashflow

• Rental income: $32,500
• Less expenses (rates, water, insurance, strata, management, maintenance): $9,800
• Less interest: $33,800
• Pre-tax cashflow: ($11,100) negative

After-tax cashflow

• Add: depreciation deduction tax saving: $6,500 × 37% = $2,400
• Less excess deduction tax recovery: ($11,100) loss × 37% = $4,100 refund/saving
• After-tax cashflow: ($11,100) - ($2,400 + $4,100) = ($4,600) negative

The pre-tax cashflow looked like an $11,100 annual cost. The after-tax cashflow is $4,600. The depreciation deductions and tax recovery cut the apparent cost by almost 60%.

For an investor in the highest tax bracket (45%), the after-tax saving is larger and the property may be close to cashflow neutral.

Why most investors do not model this

Three reasons:

Reason 1: depreciation schedules require an upfront investment

A depreciation schedule from a quantity surveyor costs $700-1,500. Most investors do not commission one in the first year. Without the schedule, they cannot claim the capital works deduction, which is the largest depreciation component.

The fix: commission the schedule. The cost is itself deductible, and the deductions you unlock are typically $5,000-15,000 per year for the life of the property.

Reason 2: agent investment summaries do not model after-tax

The standard investment summary an agent provides shows rental income minus expenses. It does not model depreciation, marginal tax brackets, or after-tax position.

The fix: use your own spreadsheet or a property investment tool that does after-tax modelling.

Reason 3: tax outcomes are not visible until end of financial year

The pre-tax cashflow is visible every fortnight. The after-tax effect is realised when you file your tax return at year-end. The lag means most investors think of the property as it appears in monthly statements (negative) rather than at year-end (less negative or positive).

The fix: model after-tax cashflow as part of the investment decision. The number you should track is the after-tax position.

When after-tax cashflow matters most

Three scenarios:

Scenario 1: borderline-affordability properties

A property where pre-tax cashflow looks just too negative to support may be affordable on an after-tax basis. The depreciation deductions and tax saving make the actual fortnightly cost manageable.

Scenario 2: high-marginal-tax investors

Investors in the 37% or 45% marginal bracket get the largest after-tax recovery. The same property generates very different after-tax outcomes for a 19% bracket investor and a 45% bracket investor.

Scenario 3: newer properties

Newer properties have higher capital works depreciation (more years of life remaining at 2.5%). A 2020-built property has 39 years of depreciation ahead. A 1995-built property has 14 years and a lower total deduction.

After-tax cashflow is the number that matters for the actual financial impact of an investment property. Pre-tax cashflow is the headline. The two can differ by $5,000-15,000 per year. Knowing the difference is the difference between thinking a property costs you $1,000 a month and knowing it actually costs you $400.