Every investment property that is held long enough stops producing a tax loss and starts producing taxable income, and eventually a capital gain. The deduction phase is temporary. The taxable phase is permanent. If you chose the owner to maximise deductions in the early years, that same owner is taxed on the rent and the gain later.

Most investment property conversations start in the wrong place. They start with how much tax the property will save this year. In our experience working with business owners and professionals, that is the least important number in the whole decision, because it is the only one guaranteed to disappear.

This guide explains why a property that is negatively geared today will almost certainly be positively geared later, what happens to your tax position when it is, what the sale year does to a high income earner, and why the ownership structure you choose before you buy is the decision that actually determines the outcome. Written by Mina Baselyous, Chartered Tax Advisor (CTA), Certified Practising Accountant (CPA) and Registered Tax Agent.

Why Every Property Eventually Becomes Positively Geared

A property becomes positively geared when rent exceeds the deductible costs of holding it. That happens on its own over time, without you doing anything, because rents tend to rise with inflation while the interest component of a principal and interest loan falls every year as the balance reduces. Depreciation deductions also shrink as the building and fittings age.

Three forces push in the same direction:

• The loan amortises. On a principal and interest loan, interest is at its highest in year one and falls every year afterwards. Interest is usually the single largest deduction, so the deduction shrinks by design.
• Rent rises. Rents broadly track inflation and market conditions over a long holding period, so the income side grows while the biggest cost falls.
• Depreciation runs out. Plant and equipment write-offs are front loaded and the capital works deduction is a fixed annual amount that ends after 40 years. Neither grows.

The crossover point varies with the loan, the rate and the rent, but the direction of travel does not. A property bought for the deduction will, if you hold it, stop giving you one. Then it starts adding to your taxable income every single year.

Negative Gearing Never Reduced Your Medicare Levy Surcharge or Division 293

This surprises almost everyone. A rental loss reduces your income tax, but it does not reduce your income for Medicare levy surcharge or Division 293 purposes. The ATO adds net rental property losses back when working out those thresholds, so the negative gearing you are relying on gives you no relief at all on either.

Income for Medicare levy surcharge purposes is taxable income plus reportable fringe benefits plus total net investment losses, which expressly includes net rental property losses, plus reportable super contributions. For 2026-27 the single surcharge thresholds start at $105,001 and the top tier begins at $164,001, charged at up to 1.5% (ATO, Medicare levy surcharge income, thresholds and rates, updated 22 June 2026).

Division 293 uses the same income test. If your income plus concessional super contributions exceeds $250,000, an extra 15% applies to your concessional contributions (ATO, Division 293 tax). A large rental loss does not help you duck under either line.

In practice, says Mina Baselyous (CPA, CTA, Registered Tax Agent), people significantly overestimate what the deduction is doing for them. You are not being paid to hold a loss. You are recovering part of a real cash cost at your marginal rate, and on the two thresholds that hurt high earners most, you are recovering nothing.

Then the Capital Gain Arrives, All in One Year

A capital gain is not spread over the years you held the property. It is assessed in the single income year the contract of sale is signed. Ten or twenty years of growth lands in one tax return, on top of your normal income, which is what pushes otherwise ordinary taxpayers into the top bracket for that year.

For an Australian resident individual in 2026-27, income above $190,000 is taxed at 45% before the 2% Medicare levy (ATO, Tax rates for Australian residents, updated 13 August 2026). A gain large enough to reach that bracket also inflates your income for Medicare levy surcharge and Division 293 in the same year, and can wipe out offsets and family payments that are income tested.

So the pattern we see again and again is this. The property is bought in the name of the highest income earner, deliberately, because that maximises the early deduction. Fifteen years later the same person, still on a high income, is taxed on the positive rent every year and then on the entire gain in the year of sale, at the highest rates available. The structure was optimised for the first three years of a thirty year decision.

The Owner You Chose for the Deduction Is the Wrong Owner for the Gain

Ownership determines who is taxed, and you cannot change it later without cost. Transferring a property to a different entity is a disposal for capital gains tax purposes and usually attracts stamp duty again. The decision you make before you sign the contract is effectively locked in for the life of the asset.

That is why the question is not simply how to get the biggest deduction now. The question is who you want receiving the rent in year twelve, and who you want assessed on the gain in year twenty. Those can be different people, and with the right structure they can be chosen at the time rather than fixed today.

The Ownership Options and What Each One Actually Does

There is no universally correct structure. Each option trades flexibility, deductibility and asset protection against cost and complexity, and the right answer depends on your income, your spouse’s income, your risk exposure and whether you are holding or developing.

Personal name, or joint names

Simplest and cheapest, and the only structure where a loss can be offset against your salary. That is its whole advantage, and it is the advantage that expires. Once the property is positive, the income is taxed at your marginal rate with no ability to redirect it, and the gain is assessed to you. Joint ownership fixes the split at the ownership percentage on the title, so it cannot be adjusted as circumstances change.

Discretionary (family) trust

The trustee decides each year who receives the income and the capital gain, within the class of beneficiaries. That is the flexibility that matters in the positive years and in the exit year: rent can be streamed to adult children studying, a lower income spouse, or a corporate beneficiary, and a capital gain can be spread across several beneficiaries rather than landing on one person at the top rate.

The trade-off is real and you need to accept it going in. A loss inside a discretionary trust is trapped in the trust. It cannot be distributed to you and offset against your salary; it carries forward until the trust has income to absorb it. Several states also apply land tax surcharges to trust-held land, which can materially change the holding cost. A trust suits the investor who is planning for the positive years and the exit, and who is not depending on the early deduction.

Fixed or unit trust

Entitlements are fixed to unit holdings rather than discretionary, which suits unrelated parties investing together because everyone knows exactly what they get. It can also allow a unit holder who borrowed to acquire their units to deduct that interest personally, which restores some of what a discretionary trust gives up. In some states a fixed trust can be treated more favourably for land tax than a discretionary one. It is more rigid than a discretionary trust and the fixed entitlement requirements are technical, so it needs to be set up properly rather than off a template.

Company

A company pays a flat rate and has no capital gains tax discount at all, which usually makes it a poor holder for a long term growth asset. It is also worth knowing that a company whose income is entirely rent is not a base rate entity, because rental income is base rate entity passive income, so it pays 30%, not 25% (ATO, Tips to get your base rate entity status correct).

Where a company earns its place is development rather than passive holding. If you are building to sell, the property is trading stock on revenue account, so the capital gains tax discount was never available to anyone and the company loses nothing by not having it. What you gain is a flat 30% on the profit, the ability to retain earnings in the company rather than being forced to take the whole profit personally in the year of completion, and the ability to release it later as franked dividends across several years and across shareholders. For a developer with lumpy project profits, that smoothing is the point.

What Changed in 2026, and Why Structure Matters More Now

Two changes make the ownership decision harder to undo and more valuable to get right. Both are law, not proposals, under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received assent on 26 June 2026.

Negative gearing is being limited to new builds. From the 2027-28 income year, losses on an established residential investment property purchased after 7:30pm AEST on 12 May 2026 can only be deducted against other residential property income, including capital gains, rather than against your salary. Properties held before that date are grandfathered and keep negative gearing until sold, and new builds, build-to-rent and social or affordable housing are exempt (ATO, Reforming negative gearing and capital gains tax).

The 50% capital gains tax discount is being replaced for individuals, trusts and partnerships with cost base indexation plus a 30% minimum tax rate, applying to gains accruing from 1 July 2027. Gains accruing before that date keep the 50% discount, and new build investors can choose between the two.

The practical effect is that for an established property bought today, the early deduction against salary largely disappears from 2027-28 anyway. The only remaining question is the one that always mattered: who is taxed on the rent when it turns positive, and who is taxed on the gain when you sell. Verify your own position against the ATO guidance above and with your adviser, because transitional dates and grandfathering are what determine which rules apply to you.

How to Make the Decision Properly

Model the whole holding period before you sign, not just the first year. In our experience the analysis that changes people’s minds is a simple one: project the rent and the interest forward to the crossover year, estimate the tax on the positive income from that point, then estimate the tax on a realistic sale in year fifteen or twenty under each ownership option. The difference between structures is frequently six figures.

Then weigh the things a spreadsheet does not show: asset protection if you run a business, land tax by state and by structure, whether you will need the early deduction to fund the holding cost, and how the property fits alongside your company, your trust and your super. Read our guides on choosing a business structure and setting up a family trust, and our explainer on how negative gearing actually works.

One caution worth stating plainly. Whether you should buy an investment property at all, and which property, is a financial advice question and we are not licensed to answer it. What we advise on is the tax and structuring consequences of the decision once you have made it, which is where the avoidable money is usually lost. Speak to us as part of your tax planning, ideally before you make an offer.

Frequently Asked Questions

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