What is Negative Gearing? Complete Guide for Australian Property Investors
Negative gearing is Australia's most widely used property tax strategy, allowing investors to claim rental losses as tax deductions. Understand how it works, who benefits most, and whether it suits your investment goals in 2026.
"Should I negatively gear my investment property?" is one of the most common questions Australian investors ask – and one of the most misunderstood. Online forums celebrate negative gearing as a "tax loophole" making property investing free money. Critics dismiss it as a government subsidy for wealthy speculators. The truth, as usual, sits between extremes: negative gearing is a legitimate tax strategy that benefits some investors in some circumstances, while creating financial stress for others.
At its core, negative gearing is simple: your investment property costs more to own than it generates in rent, creating a loss you can claim as a tax deduction against your salary or business income. In 2026, approximately 1 million Australians use this strategy across roughly 2 million investment properties, claiming an average $8,700 annual deduction that translates to roughly $2,700 in after-tax benefit. But that average conceals enormous variation – high-income earners in growth markets can effectively reduce holding costs by 47%, while low-income investors in stagnant markets might save only 19% while bleeding cash monthly.
This guide explains negative gearing using real 2026 examples, ATO rules, worked tax calculations, and honest assessment of who wins and who loses. You'll learn when negative gearing makes financial sense, when it creates unnecessary risk, and how to calculate whether your potential investment benefits from or suffers under this strategy.
⚠️ IMPORTANT DISCLAIMER
This article provides educational information about Australian tax concepts and is not tax advice, financial advice, or accounting advice. Tax rules change, personal circumstances vary, and small calculation errors can cost thousands. Always consult qualified accountants and licensed financial advisers before making investment or tax decisions. Information current as of December 2025.
What is Negative Gearing? (The Fundamentals)
Negative gearing occurs when your deductible investment property expenses exceed the rental income it generates. The ATO allows you to claim this rental loss as a tax deduction against your other income sources – typically salary, wages, or business income.
The Basic Formula
→ Council rates: $2,500
→ Insurance: $1,800
→ Property management: $2,800
→ Repairs & maintenance: $3,000
→ Depreciation: $1,900
What happens next: This $17,600 loss reduces your taxable income. If you earn $90,000 salary, your taxable income becomes $72,400 after claiming the rental loss. The tax you save depends on your marginal tax rate.
✓ Negatively Geared Properties
- → Rental income < Total expenses
- → Creates ongoing cash flow loss
- → Tax deduction offsets part of loss
- → Relies on capital growth to profit long-term
- → ~60% of Australian investment properties
✓ Positively Geared Properties
- → Rental income > Total expenses
- → Generates monthly profit/cash flow
- → Surplus taxed at marginal rate
- → Profit from day one plus potential growth
- → ~30% of Australian investment properties
Why Does Negative Gearing Exist?
The ATO treats investment properties as income-producing assets. Just like businesses can deduct expenses (rent, salaries, equipment) against business income, property investors can deduct legitimate expenses (interest, rates, maintenance) against rental income.
The unusual part: If rental expenses exceed rental income, creating a loss, the ATO allows you to offset this loss against other income sources (salary, business earnings). This effectively means taxpayers subsidize part of your holding costs through reduced tax collection. Critics argue this distorts housing markets; supporters argue it's fair treatment of investment losses consistent with other asset classes (shares, businesses also allow loss offsetting).
Real 2026 Examples: How Much Tax Do You Actually Save?
Tax savings depend on your marginal tax rate and rental loss size. Here are three realistic scenarios based on 2025-2026 tax brackets:
Scenario 1: Middle-Income Investor ($90K Salary)
30% Tax BracketProperty Details:
- → Purchase price: $700,000 (Brisbane outer suburb)
- → Loan amount: $560,000 (80% LVR)
- → Interest rate: 6.0%
- → Weekly rent: $538 ($28,000/year)
Annual Expenses:
- → Loan interest: $33,600
- → Rates, insurance, fees: $7,100
- → Repairs & maintenance: $3,000
- → Depreciation: $1,900
- Total expenses: $45,600
Tax Impact Calculation:
Bottom Line: While losing $17,600 annually on the property, tax savings of $5,280 reduce actual cash shortfall to $12,320/year ($237/week). Investor needs $1,027/month from salary to cover the gap. If property appreciates by Brisbane's recent +13.2% annual growth ($92,400 on $700K), total return is +$80,080 ($92,400 growth - $12,320 holding cost) = strong result.
Scenario 2: High-Income Investor ($200K Salary)
47% Tax BracketProperty Details:
- → Purchase price: $1,100,000 (Sydney outer ring)
- → Loan amount: $880,000 (80% LVR)
- → Interest rate: 6.0%
- → Weekly rent: $750 ($39,000/year)
Annual Expenses:
- → Loan interest: $52,800
- → Rates, insurance, fees: $9,500
- → Repairs & maintenance: $4,500
- → Depreciation: $2,800
- Total expenses: $69,600
Tax Impact Calculation:
Bottom Line: Rental loss of $30,600 generates $14,382 tax savings (47%), reducing out-of-pocket cost to $16,218/year. High-income earners benefit most from negative gearing due to higher tax brackets. If property appreciates by Sydney's recent +5.9% annual growth ($64,900 on $1.1M), total return is +$48,682 ($64,900 growth - $16,218 holding cost).
Scenario 3: Lower-Income Investor ($55K Salary)
19% Tax BracketProperty Details:
- → Purchase price: $450,000 (Regional QLD)
- → Loan amount: $405,000 (90% LVR)
- → Interest rate: 6.2% (LMI added)
- → Weekly rent: $420 ($21,840/year)
Annual Expenses:
- → Loan interest: $25,110
- → Rates, insurance, fees: $5,200
- → Repairs & maintenance: $2,200
- → Depreciation: $3,500
- Total expenses: $36,010
Tax Impact Calculation:
⚠️ Warning: Lower tax brackets receive minimal negative gearing benefits. With only $2,692 tax savings on $14,170 loss, this investor loses $11,478 annually ($221/week) – representing 21% of their $55K gross salary. This creates significant financial stress and default risk if income disrupted. Lower earners should prioritize positive or neutral cash flow properties instead.
Key Insight: Tax Bracket Determines Benefit
| Tax Bracket | Rental Loss | Tax Saved | Out-of-Pocket | Subsidy % |
|---|---|---|---|---|
| 19% ($18K-45K) | $14,170 | $2,692 | $11,478 | 19% |
| 30% ($45K-135K) | $17,600 | $5,280 | $12,320 | 30% |
| 37% ($135K-190K) | $17,600 | $6,512 | $11,088 | 37% |
| 47% ($190K+) | $30,600 | $14,382 | $16,218 | 47% |
Conclusion: Negative gearing benefits scale with income. High earners get nearly half their losses subsidized (47%), while low earners get minimal relief (19%). This explains why negative gearing is most popular among professionals earning $100K-250K annually.
What Expenses Can You Claim? (The Complete List)
The ATO allows deductions for expenses directly related to earning rental income. Here's the comprehensive breakdown:
✓ Fully Deductible Expenses
Loan Interest (Largest Deduction)
Only interest portion of mortgage repayments. Principal repayments NOT deductible. Typically 60-70% of total expenses. Example: $560K loan at 6% = $33,600/year deductible.
Property Management Fees
Typically 7-10% of rent + leasing fees. Example: On $28K rent = $2,800/year.
Council Rates & Water Charges
Annual council rates, water/sewerage usage. Example: $1,800-3,000/year depending on location.
Insurance Premiums
Landlord insurance, building insurance, contents insurance. Example: $1,500-2,500/year.
Repairs & Maintenance
Fixing existing items: plumbing repairs, painting, appliance fixes. NOT improvements. Example: $2,000-5,000/year.
Strata Fees (Units/Townhouses)
Body corporate fees, sinking fund contributions. Example: $3,000-8,000/year for apartments.
Depreciation
Building depreciation (2.5% for post-1987 properties) + plant/equipment (carpets, appliances). Requires quantity surveyor report ($500-800). Can add $5,000-15,000+ annual deductions for newer properties.
Land Tax
Annual land tax where applicable (investment properties only, varies by state).
Other Allowable Costs
Pest control, gardening/lawn care, advertising for tenants, accountant fees for tax return preparation, travel to inspect property (certain conditions).
✗ Non-Deductible Expenses
Principal Loan Repayments
Only interest deductible, not principal. On $3,500 monthly repayment ($2,800 interest + $700 principal), only $2,800 deductible.
Capital Improvements
Renovations, extensions, structural upgrades added to property's cost base for CGT calculation, not immediately deductible. Example: New kitchen $25K, bathroom renovation $15K.
Initial Purchase Costs
Stamp duty, conveyancing, building/pest inspections, loan establishment fees >$100 added to cost base, not deductible. (Borrowing costs $100-$10K can be claimed over 5 years or loan term if shorter.)
Personal Expenses
Private phone calls, personal use of property, private travel.
Non-Income Producing Periods
Expenses during periods property NOT rented or genuinely available for rent can't be claimed.
Vacancy Periods (Partial Deductibility)
If property vacant between tenants but advertised for rent: Interest, rates, insurance still deductible. Repairs/maintenance only deductible if done to attract tenants.
💡 Depreciation Strategy: The Hidden Tax Benefit
Depreciation is the most underutilized deduction for property investors. Unlike interest or rates (which you pay cash for), depreciation is a "paper loss" – you claim deductions without spending money.
Building Depreciation
Properties built after September 1987 can claim 2.5% building cost annually for 40 years. Example: $400K construction cost on $700K property = $10K/year × 2.5% = $10,000 annual deduction for newer builds.
Plant & Equipment
Carpets, blinds, appliances, air conditioning depreciate at varying rates (typically 5-20% annually). Example: $30K in fittings depreciating over 5-10 years = $3,000-6,000/year additional deductions.
Action Step: Engage quantity surveyor ($500-800 fee) to prepare depreciation schedule. For properties built 2015+, total depreciation often adds $8,000-15,000+ annual deductions, worth $2,400-7,050 in tax savings (at 30-47% brackets). The report pays for itself in the first year.
When Does Negative Gearing Actually Work?
Negative gearing is a bet: you lose money upfront (partially offset by tax) hoping capital growth exceeds your cumulative losses over time. Success requires specific conditions:
✓ Negative Gearing Works Best When:
- 1.You're in High Tax Brackets (37-47%)
Tax savings of $0.37-0.47 per dollar lost makes strategy financially viable. Lower brackets (19-30%) get minimal subsidy.
- 2.Property in Strong Growth Market
Annual capital growth exceeds after-tax holding costs. Example: Perth +11.8% ($80K growth on $700K) easily beats $12K annual loss. Melbourne +1.7% ($12K growth on $700K) barely covers losses.
- 3.You Have Stable, Secure Employment
Monthly cash shortfalls require consistent salary income. Job loss while negatively geared creates immediate crisis.
- 4.Emergency Fund Covers 12+ Months Losses
Example: $12K annual shortfall requires $12-15K savings buffer for vacancy, major repairs, income disruption.
- 5.Long Investment Timeline (7-10+ Years)
Need time for capital growth to compound and qualify for 50% CGT discount (held 12+ months). Short-term holders get crushed by transaction costs + losses.
- 6.Strong Location Fundamentals
Infrastructure delivery, employment diversity, constrained supply, vacancy <2%. Growth assumptions must have data foundation.
✗ Negative Gearing Fails When:
- 1.You're in Low Tax Brackets (19-30%)
Minimal tax savings mean you absorb 70-81% of losses personally. Better to prioritize positive cash flow.
- 2.Property in Low/No Growth Market
Losing $12K annually for 10 years ($120K) hoping for growth that doesn't materialize destroys wealth. Check location fundamentals thoroughly.
- 3.Unstable Employment or Income
Casual workers, contractors, commission-based earners face forced sales during downturns if unable to cover shortfalls.
- 4.No Emergency Savings Buffer
Unexpected major repairs ($10K+ roof, plumbing) or extended vacancy without buffer forces distressed sales.
- 5.Short-Term Investment Horizon (<5 Years)
Transaction costs (stamp duty, agent fees, CGT) plus cumulative losses unlikely recovered in short timeframes.
- 6.You Need Income Now (Retirees)
Retirees and pre-retirees should avoid negative gearing – requires subsidizing losses from savings/pension, exactly opposite of income generation goal.
The Break-Even Analysis: When Does Negative Gearing Pay Off?
Here's the math: Negative gearing only profits when cumulative capital growth exceeds cumulative after-tax holding costs over your ownership period.
Example: 10-Year Hold Period
Required Capital Growth: Property must appreciate by $173,200+ over 10 years just to break even. On $700K property, this requires +24.7% total growth, or +2.2% average annual growth. Anything above breaks into profit.
Scenario Analysis:
- → Brisbane scenario (+13.2% annual): $700K → $2.45M in 10 years = $1.75M growth - $173K costs = $1.58M profit ✓
- → Perth scenario (+11.8% annual): $700K → $2.13M in 10 years = $1.43M growth - $173K costs = $1.26M profit ✓
- → Sydney scenario (+5.9% annual): $700K → $1.21M in 10 years = $510K growth - $173K costs = $337K profit ✓
- → Melbourne scenario (+1.7% annual): $700K → $828K in 10 years = $128K growth - $173K costs = $45K LOSS ✗
Key Insight: Negative gearing only works in markets delivering sustained capital growth exceeding ~2-3% annually. Low-growth or stagnant markets destroy wealth through negative gearing. Location research is therefore CRITICAL – you're betting cumulative losses on growth assumptions.
Will Negative Gearing Be Abolished? (2026 Political Update)
Negative gearing has been politically contentious for decades, with periodic reform proposals. Here's the current status as of 2026:
Current Status: No Changes Planned
Both major parties have ruled out changes to negative gearing for the foreseeable future:
- →Labor Government (2025): Explicitly stated negative gearing reform is "not something we are proposing." Leaked Federal Treasury advice indicated changes are "off the table."
- →Coalition Opposition: Historically opposed to negative gearing restrictions, unlikely to propose changes.
- →Union Proposals: ACTU proposed in August 2025 limiting negative gearing to one investment property, but no major party adopted the policy.
Historical Context: Why Reform Failed
2016 & 2019 Elections: Labor's Proposal
Labor proposed restricting negative gearing to new builds only (grandfathering existing investments). Policy aimed to redirect investment toward new housing supply. Result: Labor lost both elections, with negative gearing cited as contributing factor. Policy became politically toxic.
Why It's Politically Difficult:
- → ~1 million property investors (plus families) = significant voting bloc
- → Fear of property price crashes - voters worry about home values declining
- → Middle-class impact - not just wealthy investors, includes teachers, nurses, tradespeople supplementing income
- → Grandfathering complexity - existing investors exempt creates two-tier system
⚠️ Risk Assessment for Investors (2026-2030)
Abolition Risk
LOW - Both parties opposed, politically toxic after 2016/2019 losses
Minor Restrictions
MODERATE - Possible caps on claimable losses or high-income earner restrictions
Grandfathering Likely
HIGH - Any changes would almost certainly exempt existing investments
Investor Action: Don't avoid sound investments purely on negative gearing reform speculation. Risk is low near-term. However, diversify strategy – don't rely exclusively on negative gearing across entire portfolio. Mix negatively geared growth properties with positive/neutral cash flow assets.
Negative vs Positive Gearing: Which Strategy Suits You?
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash Flow | Monthly loss requiring subsidy from salary | Monthly profit providing passive income |
| Tax Treatment | Rental loss reduces taxable income (tax deduction) | Rental profit increases taxable income (pay tax) |
| Best For | High-income earners (37-47% tax brackets) seeking capital growth and tax minimization | Income-focused investors, retirees, lower-income earners needing cash flow |
| Typical Locations | Capital cities (Sydney, Brisbane, Perth) - lower yields, higher growth potential | Regional areas, high-yield markets - 5-7% yields, moderate growth |
| Risk Profile | Higher - depends on ongoing income to fund losses and capital growth materializing | Lower - self-funding from day one, less dependent on growth |
| Time Horizon | Long-term (7-10+ years) to recover losses via growth | Any timeframe - profitable from year one |
| Property Types | Houses in growth suburbs, new/near-new properties (depreciation benefits) | Units, regional houses, older properties with lower purchase prices |
| Typical Yields | 3-4% gross (capital cities) | 5-7%+ gross (regional/high-yield) |
| Borrowing Capacity | Reduced - losses count against serviceability | Enhanced - profits improve serviceability for future loans |
| Portfolio Scaling | Difficult - cumulative losses limit ability to buy more | Easier - profits fund deposits for additional properties |
Choose Negative Gearing If:
- ✓ You earn $100K-250K+ (high tax brackets)
- ✓ You have stable employment and emergency funds
- ✓ You want to minimize taxable income
- ✓ You're targeting capital growth markets (Sydney, Brisbane, Perth)
- ✓ You can hold 7-10+ years for CGT discount
- ✓ You don't need immediate income from property
Choose Positive Gearing If:
- ✓ You need income now (retirees, semi-retired)
- ✓ You're in lower tax brackets (<37%)
- ✓ You have variable income (contractors, business owners)
- ✓ You want to scale portfolio quickly (use profits for next deposit)
- ✓ You prefer lower-risk, self-funding investments
- ✓ You're comfortable with regional markets for higher yields
Key Takeaways: Is Negative Gearing Right for You?
Negative gearing is a tax strategy, not a wealth strategy. It reduces your tax bill but doesn't make you money upfront. You're still losing cash monthly – just less than without the deduction.
Tax savings scale with income. High earners (47% bracket) get nearly half their losses subsidized. Low earners (19% bracket) absorb 81% of losses personally. If you're not in the 37-47% brackets, negative gearing delivers minimal benefit.
Negative gearing only profits if capital growth exceeds cumulative losses. Brisbane +13.2% growth makes negative gearing extremely profitable. Melbourne +1.7% growth barely covers costs. Location research is critical.
You need financial stability to sustain losses. Stable employment, emergency funds covering 12+ months shortfalls, and ability to weather interest rate rises are essential. Job loss while negatively geared creates crisis.
Don't negative gear just for tax deductions. Buy the property because location, fundamentals, and growth prospects are sound. Negative gearing makes good investments better (via tax relief), but can't fix bad location choices.
Engage professionals. Accountants can optimize deductions (especially depreciation). Financial advisers can model whether negative gearing suits your overall financial plan. Quantity surveyors maximize depreciation claims. These fees pay for themselves.
Abolition risk is low but not zero. Both major parties ruled out changes, but monitor policy announcements. Even if reformed, grandfathering existing investments is likely. Don't avoid sound investments purely on reform speculation.
Final Question to Ask Yourself:
"Can I comfortably afford $200-300/week from my salary to subsidize this property for 7-10 years, trusting that capital growth will exceed my cumulative losses and transaction costs?"
If yes + high tax bracket + sound location = negative gearing may suit you.
If no or uncertain = prioritize positive cash flow or neutral-geared properties instead.
Frequently Asked Questions
What is negative gearing in simple terms?
Negative gearing means your investment property costs more to own than it earns in rent. For example, if your property earns $28,000 annual rent but costs $45,600 in loan interest, rates, insurance, and maintenance, you have a $17,600 loss. This rental loss can be claimed as a tax deduction against your salary income, reducing your overall tax bill. The ATO allows you to offset investment losses against other income sources like wages or business earnings, effectively subsidizing part of your holding costs through tax savings.
How much tax do you save with negative gearing?
Tax savings equal your rental loss multiplied by your marginal tax rate. With a $17,600 rental loss and 30% tax bracket, you save $5,280 annually ($17,600 × 0.30). Higher earners in the 37% bracket save $6,512 on the same loss, while top 47% bracket earners save $8,272. However, you're still $9,328 to $12,320 out of pocket after tax savings. The average negatively geared property in Australia generates $8,700 annual deduction, translating to roughly $2,700 after-tax benefit. Tax savings only partially offset losses – negative gearing doesn't make you money upfront, it reduces how much you lose while waiting for capital growth.
Is negative gearing worth it in 2026?
Negative gearing works when capital growth exceeds your after-tax holding costs over time. If you lose $12,000 annually after tax savings but the property appreciates $40,000+ per year (like Perth +11.8%, Brisbane +13.2% in 2025), the strategy succeeds. However, negative gearing fails if: capital growth underperforms (Melbourne +1.7% barely covers costs), you can't afford negative cash flow during income disruptions, interest rates rise significantly increasing losses, or you're in low tax brackets (savings minimal). Best suited for high-income earners (37-47% brackets) with stable employment, emergency funds covering 12+ months losses, investing in high-growth locations, and holding 7-10+ years for capital gains tax discount. Not suitable for retirees, casual workers, or those needing immediate income.
What's the difference between negative gearing and positive gearing?
Negative gearing: Rental income < Expenses. You lose money monthly but claim tax deductions and hope for capital growth. Example: $538/week rent ($28,000/year) vs $45,600 costs = $17,600 loss. Positive gearing: Rental income > Expenses. You make profit monthly but pay tax on surplus. Example: $650/week rent ($33,800/year) vs $28,000 costs = $5,800 profit taxed at your marginal rate. Negative gearing suits high-income investors (reduce taxable income) in capital city growth markets (Sydney, Brisbane, Perth) willing to subsidize losses for future gains. Positive gearing suits income-focused investors, retirees needing cash flow, regional/high-yield markets (6%+ yields), and those unable to sustain ongoing losses. Many investors target neutral gearing (break-even) or slightly negative, minimizing cash flow drain while building equity.
Can negative gearing be changed or abolished in Australia?
While politically debated, negative gearing remains unchanged as of 2026. The ACTU proposed in August 2025 limiting negative gearing to one investment property, but both major parties ruled out changes. Labor stated reform is 'not something we are proposing,' and leaked Federal Treasury advice indicated changes are 'off the table.' Historical context: Labor proposed restricting negative gearing to new builds only in 2016 and 2019 elections but lost both times, making the policy politically toxic. Current status: Approximately 1 million Australians utilize negative gearing across 2+ million investment properties. Any changes would require federal legislation, extensive consultation, and likely grandfathering existing investments. Risk assessment for 2026-2030: Low probability of abolition, moderate probability of minor restrictions (e.g., capping losses claimable, removing for high-income earners). Investors should monitor policy announcements but not avoid sound investments purely on reform speculation.
What expenses can you claim with negative gearing?
Deductible expenses include: Loan interest (largest deduction – typically 60-70% of total), property management fees (7-10% of rent), council rates and water charges, landlord insurance, building and contents insurance, repairs and maintenance (not improvements), strata fees for units/townhouses, depreciation on building (2.5% for properties built post-1987) and fixtures, land tax, pest control, gardening and lawn care, advertising for tenants, and accountant/tax agent fees for investment property tax work. Non-deductible expenses: Principal loan repayments (only interest deductible), capital improvements (added to cost base for CGT), personal expenses, borrowing costs >$100 (amortized over loan term), and initial purchase costs (stamp duty, conveyancing added to cost base). Depreciation strategy: Engage quantity surveyor ($500-800) to prepare depreciation schedule maximizing claims. Building depreciation plus plant/equipment (carpets, appliances, blinds) can add $5,000-15,000+ annual deductions for new/recent properties. Record keeping: ATO requires evidence (receipts, invoices, bank statements) for all claims – keep records 5+ years.
Sources & Further Reading
Australian Taxation Office (ATO):
Government & Policy Sources:
All sources accessed December 2025. Tax rules and rates subject to change – always verify current ATO guidelines and consult qualified tax professionals.
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