Finance & Tax
Current as of 5 October 2026
Negative gearing is one of the most discussed concepts in Australian property investment. It is a legitimate tax strategy used by many investors, but it is also widely misunderstood. This guide explains what negative gearing actually means, how it works with the Australian tax system, and when it does or does not make financial sense.
An investment property is "negatively geared" when the costs of owning it exceed the income it generates. In simple terms, if your rental income is $500 per week ($26,000 per year) but your total expenses including mortgage interest, council rates, insurance, management fees, maintenance, and depreciation come to $35,000 per year, you have a net rental loss of $9,000. That $9,000 loss is what makes the property negatively geared.
The opposite is "positive gearing," where the rental income exceeds the expenses and you make a net profit each year. There is also "neutral gearing," where income and expenses are roughly equal.
Under Australian tax law, you can claim deductions for rental expenses against your rental and other income, such as your salary, wages or business income. This is the key tax benefit of negative gearing. If your other income is not enough to absorb the loss, you can carry the loss forward to the next income year. Using the example above, if you earn a salary of $120,000 and have a rental loss of $9,000, your taxable income drops to $111,000. Under the ATO's resident tax rates for 2025-26 and 2026-27, income between $45,001 and $135,000 is taxed at 30 cents for each dollar, and the Medicare levy of 2% applies on top. At that combined 32%, the $9,000 deduction saves you approximately $2,880 in tax.
It is important to understand that negative gearing does not eliminate the loss. In this example, the property costs you $9,000 more than it earns, but you get $2,880 back through tax savings. You are still out of pocket by $6,120 for the year. The strategy only makes financial sense if the property's capital growth over time more than compensates for these annual losses.
The ATO requires that all income and deduction claims for rental properties are accurate and substantiated. You must keep records of all rental income received and all expenses claimed, including receipts and bank statements. For capital works deductions you need the construction cost; if it is not possible to work out the actual cost, you can get an estimate from a quantity surveyor or other independent qualified person.
On 12 May 2026, in the 2026-27 Federal Budget, the Government announced reforms to negative gearing and capital gains tax, and the ATO reports that these measures are now law. From 1 July 2027, negative gearing for residential property investments is limited to new builds. Properties held at the announcement (7:30pm AEST on 12 May 2026) are exempt from the negative gearing change. If you are buying an established property after that time, check how the change applies to you before relying on a rental loss to reduce your other income.
The expenses you can claim against your rental income fall into two broad categories: immediate deductions and capital deductions.
Immediate deductions include the interest on the loan used to buy the property (but not payments that reduce the principal), property agent's fees and commission, council rates, water charges and land tax, insurance (building, contents, public liability and loss of rent), repairs and maintenance, pest control, cleaning, gardening and lawn mowing, advertising for tenants, body corporate administrative fund fees, and some legal expenses (such as evicting a non-paying tenant).
Capital deductions include capital works deductions for the building structure (Division 43) and the decline in value of depreciating assets such as carpets, blinds, hot water systems, ovens, and air conditioners (Division 40, over each asset's effective life). For a residential building, capital works are generally claimed at 2.5% of the construction cost per year for 40 years where construction started after 15 September 1987; construction that started between 18 July 1985 and 15 September 1987 is claimed at 4%, and nothing can be claimed for construction that started before then.
For residential rental properties, you generally cannot claim a deduction for previously used (second-hand) depreciating assets. Unless an exception applies (for example, you are carrying on a business of letting rental properties), you can only claim second-hand assets that you bought before 7:30 pm on 9 May 2017 and installed in the rental property before 1 July 2017. If you bought an established property after that time, the carpets, blinds and appliances already in it are second-hand, so only new assets you buy for the property can be depreciated. A depreciation schedule prepared by a quantity surveyor can help you identify what you can claim.
Negative gearing is not inherently good or bad. It is a financial tool that makes sense in specific circumstances.
It tends to work well when you are in a high marginal tax bracket (37% or above), meaning the tax savings are more substantial. It also makes sense when the property is in an area with strong capital growth prospects, because the annual losses are justified by long-term asset appreciation. Investors who have a long investment horizon of 7 to 10 years or more, and who can comfortably afford the annual shortfall without financial stress, are the ones who benefit most.
Negative gearing makes less sense if you are in a low tax bracket (the tax savings are minimal), if you cannot comfortably afford the annual cash shortfall, if the property is in an area with flat or declining values, or if you are nearing retirement and need income rather than tax deductions.
Negative gearing involves real financial risk. You are deliberately losing money each year in the hope that capital growth will make up for it. If property values stagnate or decline, you are left with ongoing losses and no capital gain to show for them. Interest rates can rise, increasing your costs and widening the loss. Rental markets can soften, reducing your income. Unexpected maintenance or vacancy periods can blow out your annual shortfall.
Critics of negative gearing argue that the tax concession inflates property prices, reduces housing affordability for first-home buyers, and disproportionately benefits higher-income earners. The 2026-27 Budget reforms described above now limit it to new builds from 1 July 2027 for properties bought after the announcement. Rules can change again, so check the ATO's current guidance before you rely on a rental loss in your plans.
Whether to negatively gear or aim for positive cash flow depends on your personal financial situation, risk tolerance, and investment goals. Many experienced investors start with negatively geared properties for capital growth and gradually shift toward positively geared properties as they approach retirement and need passive income.
If you choose to negatively gear, always stress-test your numbers against rising interest rates (model a 2 to 3 percentage point increase), extended vacancy periods (assume 4 to 6 weeks vacancy per year), and unexpected repairs. Ensure you have a cash buffer to cover shortfalls without relying on credit.
Regardless of your gearing strategy, every cost you can lower improves your cash position, and management fees are one of the larger ongoing costs. Compare what you pay to manage the property, whether a property manager's percentage of the rent or a fixed fee for a platform like Everfolio, against the time and work involved in managing it yourself.