Negative gearing has been one of the most debated tax strategies in Australia — especially following the 2025-26 Federal Budget discussions around housing affordability. Every election cycle, negative gearing returns to the headlines, drawing fierce opinions from economists, politicians, and property investors alike. Before you settle on whose name goes on the title, read why the ownership structure matters more than the early deduction.

But behind the debate lies a straightforward tax mechanism that hundreds of thousands of Australian investors use every year. Understanding how it actually works — and when it makes sense for your situation — is far more valuable than the political noise.

In this guide, we’ll explain exactly what negative gearing is, how the tax deduction works in practice, what costs you can and can’t claim, how it intersects with capital gains tax, and what the 2026-27 Budget reforms to negative gearing and CGT, now law and applying from 1 July 2027, mean for property investors. Whether you’re considering your first investment property or reviewing an existing portfolio, this guide gives you the full picture.

What Is Negative Gearing?

A property — or any income-producing investment — is negatively geared when the costs of owning it exceed the income it generates.

In practice, this means your rental income is less than your total expenses for the year. The shortfall — that annual loss — can then be deducted against your other income, such as salary, wages, or business income. This reduces your overall taxable income and, as a result, your tax bill.

It’s worth noting that negative gearing isn’t exclusive to property. The same rules apply to shares purchased with a loan, managed funds, and other income-producing investments. But in Australia, negative gearing is most commonly associated with residential investment property — and that’s where most of the policy debate has been focused.

Here’s a straightforward example to illustrate the concept:

• Rental income: $28,000 per year
• Total costs (loan interest, council rates, insurance, depreciation): $38,000 per year
• Net rental loss: $10,000

That $10,000 loss is deductible against your other income. If you’re on a 37% marginal tax rate, your tax saving is $3,700 per year — reducing the real after-tax cost of holding the property from $10,000 to $6,300.

The reason investors accept an annual cash shortfall is the expectation that the property will grow in value over time. The strategy is to claim tax deductions today — reducing the net cost of holding the investment — then sell at a profit years later and pay capital gains tax at a discounted rate. For more on how tax planning strategies integrate with your overall financial structure, see our guide to tax planning for business owners and investors, and our perspective on whether a property capital gain is real wealth or just inflation.

How Negative Gearing Reduces Your Tax — A Worked Example

Let’s look at a realistic example to see exactly how negative gearing affects someone’s tax position.

Sarah is a project manager earning $120,000 per year. She’s in the 37% marginal tax bracket. She owns a rental property that generates $24,000 in rent per year, but her annual holding costs are:

Expense	Annual Amount
Loan interest	$28,000
Council rates	$1,200
Landlord insurance	$1,800
Depreciation (plant & equipment)	$4,000
Total costs	$35,000

Net rental loss: $35,000 − $24,000 = $11,000

This $11,000 loss is offset against Sarah’s employment income:

• Taxable income without property: $120,000
• Less: rental loss: −$11,000
• Adjusted taxable income: $109,000

At a 37% marginal rate, the tax saving on $11,000 is approximately $4,070 per year.

So while Sarah’s property is technically “losing” $11,000 on paper, her real after-tax cost is only $6,930 per year — because the ATO effectively subsidises $4,070 of that loss through reduced income tax. Meanwhile, Sarah expects the property to appreciate in value over time. When she eventually sells, if she’s held it for more than 12 months, she’ll qualify for the 50% CGT discount — meaning she’ll only pay tax on half the capital gain. (As explained below, for CGT events from 1 July 2027 the 50% discount is being replaced by cost base indexation plus a 30% minimum tax on capital gains, so gains accruing after that date are treated differently.)

This is the core logic of negative gearing: short-term tax deductions, long-term capital growth.

What Costs Can You Deduct?

Not all property expenses are treated equally by the ATO. There are two categories: those you can claim immediately in the year incurred, and those you must depreciate over time.

Immediately Deductible (in the year incurred)

You can claim the following in full in the income year you incur them:

• Loan interest (on the investment loan only — not any personal portion)
• Property management fees
• Council rates and water rates
• Landlord and building insurance
• Repairs and maintenance (restoring to original condition — not improvements)
• Body corporate and strata levies
• Advertising for tenants
• Pest control, cleaning, and gardening
• Accounting fees related to the investment
• Legal expenses for lease preparation (not property acquisition)

Depreciated Over Time (not immediately deductible)

Two categories of capital expenses must be claimed over time rather than upfront:

1. Capital works — Division 43: If the property was constructed after 15 September 1987, you can claim 2.5% of the original construction cost per year for 40 years. Many investors overlook this deduction entirely, often because they don’t have a quantity surveyor’s report to quantify it.
2. Plant and equipment depreciation: Depreciable assets with a limited effective life — dishwashers, carpets, blinds, hot water systems, air conditioners — are depreciated over their ATO-specified effective life. The effective life schedules are published by the ATO and vary by asset type.

Important exclusions:

• Travel expenses to inspect your rental property are no longer deductible — this was abolished from 1 July 2017.
• Expenses for periods when the property was used privately must be apportioned accordingly.
• Purchase costs (stamp duty, legal fees on acquisition) are capital costs that increase your cost base for CGT purposes — they are not immediate deductions.

A qualified quantity surveyor’s depreciation report typically costs $500–$800 but can uncover thousands of dollars in annual deductions. For the ATO’s full guidance on rental deductions, visit ato.gov.au.

Capital Gains Tax and Negative Gearing — The Full Picture

Negative gearing only makes financial sense if you genuinely expect the property to appreciate in value. The annual cash shortfall — even after the tax benefit — must ultimately be recovered through a profitable sale.

When you sell, you’ll pay capital gains tax on the profit: the sale price minus your cost base (which includes the original purchase price, buying costs such as stamp duty and conveyancing fees, and the cost of capital improvements made during ownership).

The critical concession for individual investors: if you’ve held the property for more than 12 months, you qualify for the 50% CGT discount. You only include half the capital gain in your assessable income for that year. This is the rule for CGT events up to 1 July 2027; for gains accruing after that date, see the section below on the 2026-27 Budget reform.

This creates a deliberate tax asymmetry that high-income investors actively use:

• Annual rental deductions: claimed at your full marginal rate (up to 47% including the Medicare levy)
• Capital gain on eventual sale: effectively taxed at roughly half your marginal rate (after the 50% CGT discount)

The strategy is to claim full deductions at a high rate now, then pay tax on the gain at an effective lower rate later. This is why negative gearing is so commonly used by high-income earners — the annual tax benefit reduces the cost of holding the asset while capital growth builds long-term wealth. See also our article on Division 7A loans and how tax rules interact with different investment structures.

The 2026-27 Budget Reform: What Actually Changed

Throughout 2025-26, negative gearing was a flashpoint in Australia’s housing affordability debate. Labor’s longstanding position was to “quarantine” negative gearing losses, so that losses on established property could only be deducted against rental income, not against salary or business income. In the 2026-27 Federal Budget, handed down on 12 May 2026, the Government acted, and the changes have since been legislated.

Where things stand now (as at September 2026): the changes are law. The ATO confirms on its new-legislation guidance that, from 1 July 2027, negative gearing is limited to new builds and the 50% CGT discount is replaced by cost base indexation plus a 30% minimum tax on capital gains for individuals, trusts and partnerships (Australian Taxation Office, reforming negative gearing and capital gains tax). The measures were legislated as the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

What this means in practice is important: negative gearing is being limited to new builds, not abolished. An investor who buys established residential property after Budget night (7:30pm AEST, 12 May 2026) can still deduct rental losses against their residential property income and carry unused losses forward, but from 1 July 2027 they can no longer deduct those losses against other income such as wages. Properties held before Budget night are grandfathered and continue under the current rules, and investors in eligible new builds keep both negative gearing and the choice of the 50% CGT discount.

The practical takeaway: the worked examples above reflect the rules that apply up to 1 July 2027, and that continue to apply to grandfathered and eligible new-build properties. If you are buying established residential property now, factor in that from 1 July 2027 the loss will offset property income only, not your salary or business income. Work with a registered tax agent to model your specific position, and verify the current rules directly with the ATO before making decisions.

Who Benefits Most from Negative Gearing?

Not every investor benefits equally from negative gearing. The tax advantage is directly proportional to your marginal tax rate — the higher your rate, the larger the benefit.

• High-income earners (37% or 45% marginal rates) receive the largest tax benefit. A $10,000 net rental loss saves between $3,700 and $4,700 per year in tax. For investors in lower tax brackets, the benefit is proportionally smaller.
• Investors with significant interest costs (high loan-to-value ratios) are more likely to be negatively geared, particularly in the early years of the loan when the outstanding principal — and therefore interest — is at its highest.
• Properties in genuine capital growth corridors — established inner-city suburbs in Melbourne and Sydney, and high-demand growth areas — are better suited to the strategy than low-growth regional markets where capital appreciation may not materialise to justify the annual shortfall.
• Investors who can comfortably service the cash shortfall. Negative gearing is not appropriate for investors who are stretched to their borrowing limit. The annual after-tax cash shortfall must remain manageable in all market conditions — including when interest rates rise.

Common Negative Gearing Mistakes

Negative gearing is a legitimate and well-established tax strategy, but the ATO actively scrutinises rental property deductions. These are the most common mistakes we see investors make:

1. Claiming capital expenses as immediate deductions. Replacing an entire bathroom suite is a capital improvement — not a repair. Repairs restore something to its original condition; improvements go beyond that. Getting this wrong is one of the ATO’s key audit triggers for rental properties.
2. Failing to apportion expenses. If your investment property was rented for only part of the year, or if you or family members used it personally at any point, all expenses must be apportioned for the periods of genuine rental use only.
3. Poor record-keeping. The ATO requires records to be kept for five years after lodging your return. This includes loan statements, rental statements from your property manager, invoices for all expenses, and rental agreements. Missing records at audit time can result in deductions being disallowed.
4. Mixing investment and personal loan funds. If you redraw on your investment property loan for personal purposes — a holiday, home renovations — you lose deductibility on that portion of the interest going forward. This is extremely difficult and costly to untangle once it has occurred.
5. Over-estimating capital growth. The investment must make commercial sense. If the capital growth assumption is unrealistic, the annual cash shortfall can compound over many years without the eventual upside to compensate.
6. Not commissioning a depreciation report. A quantity surveyor’s depreciation schedule typically costs $500–$800 and can reveal thousands in annual deductions — particularly Division 43 capital works deductions — that many investors simply don’t know to claim.

Negative Gearing vs Positive Gearing — Which Is Better?

Negative gearing attracts most of the attention, but understanding positive gearing helps you choose the right strategy for your circumstances.

Negatively geared: The property costs more to hold than it earns. You claim a deduction against other income now and aim for capital growth later. Best suited to high-income earners who can afford the annual shortfall and are focused on long-term wealth accumulation.

Positively geared: The property earns more than it costs. The surplus is additional taxable income each year, but your cash flow is positive without relying on capital growth to make the investment viable. Often better suited to investors who need income now — such as retirees or those in lower tax brackets where the negative gearing benefit would be minimal anyway.

Neither approach is universally superior. The right strategy depends on your marginal tax rate, your cash flow needs, your investment horizon, and the specific property you’re buying. A well-structured portfolio often includes both — negatively geared growth assets alongside positively geared yield properties that provide ongoing income. For a tailored analysis, our Virtual CFO service can model the actual numbers for your situation.

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⚠️ General Advice Warning: The information on this page is general in nature and does not constitute personal financial, tax or legal advice. Tax laws change regularly and what applies to negative gearing in Australia may be different by the time you read this. Always seek tailored professional advice from a registered tax agent before making investment decisions.

Frequently Asked Questions

This article contains general advice only and does not take into account your specific circumstances. Please speak with a qualified accountant or tax adviser before making financial decisions.

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