Negative Gearing Explained — A Complete Guide for Australian Investors
Last updated: April 2026 · Financial year 2025-26
Negative gearing occurs when the costs of owning an investment property — loan interest, management fees, insurance, repairs, and depreciation — exceed the rental income it generates. The resulting loss can be offset against your other income, such as your salary, reducing your overall taxable income and the amount of tax you pay. It is one of the most widely used tax strategies among Australian property investors.
What Is Negative Gearing?
In simple terms, a property is negatively geared when it costs you more to hold than it earns in rent. The word "gearing" refers to borrowing money to invest — the "negative" part means the investment is running at a loss.
Under Australian tax law, this rental loss is not quarantined to your property income. It can be deducted from your total taxable income, including wages, salary, business income, and other investment income. This is what makes negative gearing so powerful — and so debated.
| Item | Annual Amount |
|---|---|
| Rental income ($400/week × 52) | +$20,800 |
| Loan interest ($400K loan at 6.2%) | -$24,800 |
| Council & water rates | -$3,200 |
| Insurance | -$1,800 |
| Property management (7% of rent) | -$1,456 |
| Repairs & maintenance | -$1,000 |
| Depreciation (estimated) | -$6,000 |
| Total expenses | -$38,256 |
| Net rental loss (negatively geared) | -$17,456 |
This $17,456 loss is deducted from your other income on your tax return, reducing the amount of tax you owe. Note that $6,000 of this loss is a "paper loss" from depreciation — no cash leaves your bank account for that portion.
How Does Negative Gearing Reduce Your Tax?
Negative gearing reduces your tax because the rental loss is subtracted from your total income before tax is calculated. The higher your marginal tax rate, the greater the tax saving.
Here is how it works step by step:
Calculate your net rental loss
Add up all rental income, then subtract all deductible expenses (interest, rates, insurance, management fees, repairs, depreciation). If expenses exceed income, you have a rental loss.
Subtract the loss from your other income
The loss is deducted from your salary, wages, business income, or other investment income on your tax return.
Pay tax on the reduced amount
Your taxable income is now lower, so you pay less tax. The saving equals the rental loss multiplied by your marginal tax rate.
| Taxable Income | Marginal Rate | Tax Saved on $10K Loss |
|---|---|---|
| $18,201 – $45,000 | 16% | $1,600 |
| $45,001 – $135,000 | 30% | $3,000 |
| $135,001 – $190,000 | 37% | $3,700 |
| $190,001+ | 45% | $4,500 |
An investor earning $150,000 who makes a $10,000 rental loss saves $3,700 in tax (37% marginal rate). The same $10,000 loss for someone earning $50,000 saves $3,000 (30% marginal rate). This is why negative gearing is often described as disproportionately benefiting higher-income earners.
Calculate your exact tax saving with our free Negative Gearing Calculator.
What Expenses Can You Claim Under Negative Gearing?
The ATO allows a wide range of deductions for investment property expenses. These are the costs that contribute to your rental loss and make your property negatively geared.
Loan interest
Interest on your investment loan — typically the largest single deduction.
Council & water rates
Fully deductible in the financial year they are paid.
Insurance premiums
Landlord, building, and contents insurance for the rental property.
Property management fees
Fees for tenant sourcing, rent collection, and ongoing management.
Repairs & maintenance
Costs to restore the property to its original condition (not improvements).
Body corporate / strata levies
Quarterly levies including special levies for repairs (not capital works to common areas).
Land tax
Annual state land tax is fully deductible against rental income.
Advertising for tenants
Online listings, signage, and other tenant sourcing costs.
Depreciation — Div 40
Decline in value of plant and equipment (carpets, blinds, appliances, hot water systems).
Depreciation — Div 43
Capital works deduction at 2.5% p.a. on the building structure (post-September 1987).
Tax agent & QS fees
Tax return preparation costs (investment portion) and depreciation schedule fees.
Legal expenses
Costs for lease preparation, tenant disputes, and eviction proceedings.
Use our Tax Deduction Checklist to make sure you are not missing any claimable expenses.
Negative Gearing vs Positive Gearing — Which Is Better?
The debate between negative and positive gearing comes down to a trade-off: do you want tax benefits now (negative gearing) or cash flow now (positive gearing)? Neither strategy is universally better — the right choice depends on your income, goals, and risk tolerance.
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | You top up the shortfall each week/month | Generates surplus income |
| Tax impact | Reduces your taxable income | Adds to your taxable income |
| Capital growth focus | Typically higher-growth locations | Typically higher-yield regional areas |
| Risk level | Higher — relies on capital growth | Lower — income covers costs |
| Best suited for | Higher income earners (30%+ tax bracket) | Investors seeking passive income or nearing retirement |
| Interest rate sensitivity | High — rate rises increase losses | Lower — surplus absorbs rate rises |
Run the numbers with our Negative Gearing Calculator
Model your cash flow with our Cash Flow Calculator
Is Negative Gearing Worth It in 2026?
With interest rates still elevated and the federal budget fuelling speculation about potential changes to negative gearing, this is the most common question Australian property investors are asking in 2026. Here are the key factors to consider.
Higher interest rates mean larger loan interest deductions, which increases the rental loss and the resulting tax benefit. Paradoxically, the current rate environment makes negative gearing more effective as a tax strategy — but it also means the cash-flow cost of holding a negatively geared property is higher. The after-tax cost is what matters: if your marginal rate is 37%, a $10,000 increase in interest costs you $6,300 after the tax refund.
Negative gearing reform has been on and off the political agenda for years. Previous proposals have included limiting negative gearing to new-build properties only. As of April 2026, no legislation has been passed to change the current rules, and any future changes are widely expected to be grandfathered — meaning existing investors would keep their current arrangements. However, the ongoing debate creates uncertainty, and investors should monitor budget announcements.
Negative gearing only makes financial sense if the property's capital growth exceeds the after-tax cost of the rental loss over time. Historically, well-located Australian property has grown at 6-7% per year on average over 20+ year periods, comfortably outstripping typical holding costs. But past performance is no guarantee — buying in a flat or declining market while subsidising a rental loss can erode your wealth. Location selection and timing remain critical.
A common mistake is focusing on the tax refund while ignoring the real cash-flow impact. If your property costs you $200 per week more than it earns in rent, you are spending $10,400 per year out of pocket. A $3,700 tax refund (at 37% marginal rate) brings the true cost down to $6,700 — but that is still $6,700 you need to fund. Make sure you can comfortably sustain the cash-flow shortfall, especially if rates rise further or the property sits vacant.
The Role of Depreciation in Negative Gearing
Depreciation is the secret weapon of negative gearing. It creates a tax deduction for the wear and tear on your property and its fixtures — without requiring any cash outlay. This "paper loss" can significantly boost your rental loss and tax refund.
Covers removable fixtures and fittings: carpet, blinds, air conditioners, hot water systems, dishwashers, cooktops, and smoke alarms. Each asset has an ATO-defined effective life and is depreciated over that period.
Post-2017 rule: For established (second-hand) residential properties purchased after 9 May 2017, Division 40 deductions for previously used plant and equipment are no longer available to the new owner. You can only claim Division 40 for brand-new assets you install yourself. This rule does not apply to new-build properties.
Covers the building structure itself — walls, roof, floors, built-in cupboards, and structural improvements. Residential buildings constructed after 15 September 1987 qualify for a 2.5% annual deduction on the original construction cost over 40 years. Unlike Division 40, these deductions are available for second-hand properties.
Example: A property with $300,000 in construction costs generates a $7,500 annual Division 43 deduction ($300,000 × 2.5%) — with no cash spent. Over 40 years, you claim the entire $300,000.
| Deduction Type | New Build | Established (post-May 2017 purchase) |
|---|---|---|
| Division 43 (building structure) | ||
| Division 40 (existing plant & equipment) | ||
| Division 40 (new items you install) |
Estimate your depreciation deductions with our Depreciation Estimator.
Common Negative Gearing Mistakes to Avoid
Not keeping proper records
The ATO requires records for every expense claimed. Without receipts, bank statements, and a depreciation schedule, your deductions may be disallowed in an audit. Investment property is one of the ATO's top audit targets — they data-match rental income from real estate agents against your tax return.
Claiming ineligible expenses
Capital improvements (renovations, additions, structural changes) are not immediately deductible — they must be depreciated over time or added to your cost base. Confusing repairs (deductible) with improvements (not immediately deductible) is the most common error the ATO finds.
Over-leveraging for the tax benefit
Buying a property primarily for the tax benefit, without considering cash flow sustainability, is dangerous. If you cannot afford to hold the property through vacancy periods, interest rate rises, or unexpected repairs, you may be forced to sell at the wrong time.
Ignoring cash flow and only seeing the tax refund
A $5,000 tax refund does not make up for a $15,000 annual cash-flow shortfall. Always calculate the after-tax cost of holding the property and make sure you can sustain it. Use a cash-flow calculator, not just a tax calculator.
Forgetting depreciation
Many investors miss thousands of dollars in depreciation deductions every year by not getting a depreciation schedule from a qualified quantity surveyor. Even established properties built after 1987 qualify for Division 43 capital works deductions.
Not reviewing your position annually
Your gearing position changes every year as rents rise, interest rates move, and your loan balance decreases. What was negatively geared last year may be positively geared this year — and vice versa. Review your position at least once per financial year.
How to Calculate Your Negative Gearing Position
Calculating whether your property is negatively or positively geared is straightforward once you have the numbers.
Net Rental Position = Annual Rental Income − Total Deductible Expenses
If the result is negative: Negatively geared — the loss offsets your other income.
If the result is positive: Positively geared — the surplus is added to your taxable income.
If the result is zero: Neutrally geared — income equals expenses exactly.
| Annual rental income | $26,000 |
| Total deductible expenses (incl. depreciation) | $38,000 |
| Net rental loss | -$12,000 |
| Tax refund (at 37% marginal rate) | +$4,440 |
| Less: depreciation (non-cash, add back) | +$6,000 |
| True after-tax cash cost per year | -$1,560 |
In this example, the property has a $12,000 rental loss on paper — but after the tax refund ($4,440) and adding back the non-cash depreciation ($6,000), the true out-of-pocket cost is only $1,560 per year, or about $30 per week. Meanwhile, the property's value may be growing at 5-7% per year ($25,000– $35,000 on a $500K property).
Negative Gearing Calculator — model your tax position instantly
Rental Yield Calculator — check your gross and net yield
Frequently Asked Questions
Yes. There is no limit on the number of properties you can negatively gear in Australia. The total net rental loss from all your investment properties is combined and offset against your other income (such as salary) on your tax return. Each property is assessed individually, but the ATO aggregates all rental income and expenses across your portfolio.
Expenses on vacant land held for investment purposes (such as interest and council rates) cannot be claimed as a deduction while the land is vacant. Since 1 July 2019, the ATO requires you to hold these costs and add them to the cost base of the land for capital gains tax purposes instead. Once a property is built and available for rent, normal negative gearing rules apply.
Only for the periods the property is genuinely available for rent at market rates. If you use the property yourself for part of the year, you must apportion expenses between private use and rental use. The ATO closely scrutinises holiday rental properties, particularly those in popular tourist areas that are rented below market rates or have excessive periods of personal use.
When you sell a negatively geared property, you pay capital gains tax (CGT) on any profit. The cost base includes your purchase price plus capital expenses (stamp duty, legal fees, capital improvements). If you held the property for more than 12 months, you receive a 50% CGT discount (for individuals). Depreciation previously claimed under Division 40 may also be subject to a balancing adjustment (depreciation clawback) if the asset is sold for more than its written-down value.
As of April 2026, negative gearing remains fully available for all investment properties in Australia. While there has been significant political debate — and Labor proposed limiting negative gearing to new builds in previous elections — no legislation has been passed to restrict or abolish it. Any changes would likely be grandfathered, meaning existing investors would retain their current arrangements.
Yes, negative gearing is not limited to property. If you borrow to invest in shares or ETFs and the interest on the loan exceeds your dividend income, the net loss can be offset against your other income. However, shares do not offer depreciation deductions, and the risk profile is different from property. This guide focuses on property negative gearing.
There is no time limit. You can negatively gear a property for as long as the rental expenses exceed the rental income. In practice, many properties transition from negatively geared to positively geared over time as rents increase while loan repayments and other costs remain stable or decrease (especially as the loan principal is paid down).
While not legally required, using a qualified tax accountant is strongly recommended. Investment property tax returns involve depreciation schedules, capital works deductions, apportionments, and complex rules around repairs vs improvements. An accountant ensures you claim everything you are entitled to (the average investor misses $2,000–$5,000 in deductions per year) and reduces the risk of an ATO audit. The accountant's fees are themselves tax-deductible.
Track Your Negative Gearing Position Automatically
PropBoss automatically tracks your rental income, expenses, depreciation, and tax position across your entire portfolio — so you always know whether each property is negatively or positively geared, and exactly what your after-tax cost is.
Related Guides & Tools
Tax Deduction Checklist
Make sure you claim every eligible deduction.
Depreciation Estimator
Estimate your Division 40 & 43 deductions.
Cash Flow Calculator
Model the real cash-flow cost of holding a property.
Rental Yield Calculator
Calculate gross and net rental yield.
State Tax Deduction Guides
State-by-state tax deduction guides for every territory.
Capital Gains Tax Calculator
Estimate CGT when you sell your investment property.