Do Tax Deductions such as Negative Gearing need to coincide with Tax Brackets? ATTEMPT AT MAKING THE QUESTION AS SIMPLE AS POSSIBLE: Fred earns $60,000 a year and has a few investment properties which costs him $30,000 out of pocket annually after all income and expenses have been taken into account. Due to negative gearing this means he can deduct this amount from his taxable income - How much money would Fred get back? MY QUESTION IN MORE DETAIL: Fred works full time earning an annual gross income of $60,000 a year, plus super. According to current ATO tax brackets this means he would be paying: $4,350 plus 30c for each $1 over $35,000. ($25,000 @ 30% = $7,500) So $11,850 tax in total. Fred also owns 3 investment properties which earn him a gross annual income of $70,000. Outgoings and Loan Interest on the IP's costs Fred $100,000 annually. This leaves Fred $30,000 in the red and because of Negative Gearing allows Fred to claim this amount as a Tax Deduction. Now provided the information above is correct up until now, how much would Fred be able to claim back exactly? $8,250? a) Does the IP income get cancelled out by the IP costs and not get taken into consideration at all, leaving his taxable income at $60,000 with a $30,000 tax deduction. So Fred would only be able to claim 30% of $25,000 (because that's all he paid 30% on) and then 15% of the remaining $5,000? ($7,500 + $750 = $8,250) OR b) Would Freds rental income be added to his working income ($60,000 + $70,000) giving him a total taxable income of $130,000 and put him into the 38% tax bracket, then allowing him to claim back 38% of $30,000. EDIT: Just noticed this method might be exactly the same as a) if you take the gross income of $130,000 and offset it against the expenses you're left with a $30,000 taxable income. Which would be the same as claiming $30,000 worth of Tax Deductions on a $60,000 income. I guess it's just a matter of when/how the deductions are calculated. My assumption is they would probably be done on your taxable income AFTER it has been offset against all your deductions, not before? i.e In the scenario above Fred had $130,000 income with $100,00 worth of deductible expenses leaving him with a $30,000 taxable income, however because his job does PAYG he paid tax on $60,000 income, of which he can now make $30,000 worth of deductions, essentially what I said in a) ? _____________________________ I ask because I'm considering buying 2 more IP's and Negative Gearing a fair bit while I'm still young and living at home, but it looks like there would be quite a lot I'd be claiming back and if it turns out I can only claim my tax bracketed amount it probably wouldn't be worth gearing so much if I could only claim back 15% on some of the expenses and might be better for me to just buy 1 more IP instead of 2. This isn't some sort of HW question or anything and yes I know I should speak to an accountant before making any final decisions, but getting an idea on how this works would then let me know whether to take things further with an accountant or not. Like I said, if scenario a) is the answer, it probably wouldn't be worth my while.