Key Takeaway: Negative gearing lets you offset property losses against your taxable income — reducing your tax bill. But it only works if the property appreciates over time. From 2026, negative gearing on established properties is a hot political topic; new properties remain the safest bet. Don't buy purely for the tax benefit.
What Negative Gearing Actually Is
Negative gearing is a tax strategy used by Australian property investors. It occurs when the cost of owning an investment property (mortgage interest, maintenance, fees) exceeds the rental income it produces. The net loss can be deducted from your other taxable income — reducing your overall tax bill. The mechanics sound simple, but the strategy is widely misunderstood. Negative gearing isn't free money. You're spending real cash to generate a tax deduction. The strategy only makes sense if the property's capital appreciation over time exceeds the ongoing cash losses. For most Australian property investors, the equation looks like this: • Rental income: $25,000/year • Mortgage interest: $30,000/year • Maintenance, insurance, strata: $8,000/year • Total expenses: $38,000/year • Net loss: $13,000/year • Tax saving (at 37% marginal rate): $4,810/year • Out-of-pocket cost: $8,190/year That $8,190/year is what you're paying in exchange for the property's expected capital growth. If the property appreciates at 5% annually on a $700,000 purchase price, that's $35,000/year in gains — dwarfing the $8,190 annual cash cost.
How the Tax Deduction Works
The negative gearing deduction is applied against your total taxable income, not just your property income. This is important: if you earn $120,000 in salary and lose $13,000 on your investment property, your taxable income drops to $107,000. The tax saving depends on your marginal rate: • $45,000–$135,000 salary (32.5% marginal rate + 2% Medicare): $13,000 × 34.5% = $4,485 tax saved • $135,000–$190,000 salary (37% marginal rate + 2% Medicare): $13,000 × 39% = $5,070 tax saved • Above $190,000 (45% marginal rate + 2% Medicare): $13,000 × 47% = $6,110 tax saved Higher earners get a bigger benefit because their marginal rate is higher. This is why negative gearing is often criticised as a strategy that primarily benefits wealthier Australians — the tax savings are disproportionate to income bracket.
A Worked Example
Meet Priya, a Sydney-based professional earning $150,000/year. She buys an investment property for $700,000 with an 80% loan ($560,000 at 6% interest). Annual income and expenses: • Rental income: $28,000 (4% gross yield) • Mortgage interest: $33,600 (6% on $560,000) • Council rates: $2,000 • Strata fees: $4,000 • Insurance: $1,500 • Property management: $2,200 (8% of rent) • Repairs and maintenance: $2,000 • Total expenses: $45,300 Net loss: $17,300 Tax impact: Priya's marginal rate is 37% + 2% Medicare = 39%. Tax saving: $17,300 × 39% = $6,747 Cash flow analysis: • Rental income received: $28,000 • Cash expenses paid: $33,600 + $11,700 = $45,300 • Net cash outflow: $17,300 • Tax refund from ATO: $6,747 • Net out-of-pocket: $10,553/year ($880/month) So Priya is spending roughly $880/month to hold the property. If the property appreciates at 5%/year ($35,000), she's effectively paying $10,553 for $35,000 in unrealised gains — a 3.3x return on cash outlay. That's the negative gearing calculation. Important caveat: This only works if the property appreciates. In a flat market, Priya is simply losing $10,553/year with no offsetting benefit.
When Negative Gearing Makes Sense
1. High marginal tax rate. The higher your marginal rate, the bigger the tax deduction. Negative gearing is most effective for investors earning above $135,000 (37%+ Medicare). 2. Strong capital growth expectations. The strategy only works if the property appreciates. Focus on properties in areas with strong long-term demand — Sydney, Melbourne, Brisbane inner suburbs, or high-growth regional centres. 3. Long-term holding. Property is a 10+ year commitment. Transaction costs (stamp duty, agent fees, legal) are 5–7% of purchase price. Don't negative-gear a property you plan to sell in 3 years. 4. Cash flow cushion. You need to cover the ongoing losses from your salary. A $10,000/year net outflow on top of your regular expenses requires genuine surplus cash flow. 5. Diversified portfolio. Don't put 80% of your net worth into one investment property. Australian property can have decade-long flat periods — Sydney 2003–2012 is a cautionary example.
When Negative Gearing Is a Bad Idea
1. You can't afford the losses. If the property is losing $20,000/year and that stresses your cash flow, don't do it. Negative gearing should be funded from surplus income, never from emergency savings or debt. 2. You're a basic rate taxpayer (under $45,000). The 16–19% tax bracket makes the deduction much less valuable. The same property would cost you $17,300 out-of-pocket vs $10,553 for a high earner. 3. You're buying in a flat or falling market. If the property declines in value, you lose on both fronts — negative cash flow and capital losses. 4. You need liquidity. Property is illiquid. Selling takes 3–6 months, and you can't sell a bathroom to cover a car repair. 5. You're already overexposed to property. If your own home is worth $1.5M and you're buying another $800K property, you have $2.3M tied up in Australian residential real estate. That's concentration risk.
The 2026 Policy Risk
Negative gearing has become a political football. The Australian Labor Party has considered changes multiple times (2016, 2019, and again in 2024 discussion papers). The proposals typically involve: • Limiting negative gearing to new properties only. Established properties would no longer qualify for the deduction against salary income. • Reducing the capital gains tax discount. Currently 50% for individuals holding an asset over 12 months; proposals have suggested reducing to 25%. No changes were legislated as of 2026, but the policy risk is real. If you're considering a negative gearing strategy: • Prioritise new properties. They're more likely to retain the deduction under any reform. • Model scenarios without the tax deduction. If the deal only works with negative gearing, it's fragile. • Don't over-leverage. If negative gearing is removed, your cash flow needs to survive without the tax refund.
Negative Gearing vs Positive Gearing
Some investors intentionally pursue positively geared properties — where rental income exceeds expenses. These properties generate cash flow but usually in lower-growth areas (regional towns, secondary cities). Negative gearing (typical for high-growth metros): • Yields of 2–4% • Capital growth of 5–8% • Cash flow negative in early years • Tax deduction benefit • Best for high earners Positive gearing (typical for regional areas): • Yields of 5–8% • Capital growth of 2–4% • Cash flow positive from day one • Taxable income from property • Best for investors needing cash flow The right choice depends on your goals. If you want capital growth and can tolerate negative cash flow, high-growth metros with negative gearing work well. If you need income, positive gearing in regional areas is better.
Frequently Asked Questions
Is negative gearing still legal in Australia?
Yes, as of 2026. No changes have been legislated. However, both major parties have discussed reforms, and the policy is under active review. New properties are considered safer from a policy perspective than established properties.
How much can I claim for negative gearing?
The full net loss on the investment property. All legitimate expenses — mortgage interest, council rates, strata, insurance, property management, repairs, depreciation — can be claimed against rental income. Any excess loss offsets your other taxable income, saving tax at your marginal rate.
Can I claim negative gearing on my own home?
No. Negative gearing only applies to investment properties that produce rental income. Your own home (PPOR — Principal Place of Residence) doesn't generate income, so its expenses aren't deductible. You also don't pay capital gains tax on your PPOR.
Do I need a depreciation schedule?
Yes, for maximum benefit. A quantity surveyor can prepare a depreciation schedule (cost: $600–$800) that identifies deductions for the building's decline in value and the fixtures/fittings. This often adds $5,000–$15,000/year in additional deductions. It pays for itself in the first year.
What happens if my property turns positive?
You pay tax on the profit. If rental income exceeds expenses in a given year, the net profit is added to your taxable income. This is called 'positively geared' — a good problem to have. You can offset it by having multiple properties where some are negative and some are positive.
Can I negative gear through a trust or company?
Yes, but with restrictions. Companies pay 30% tax (or 25% for small business), so the deduction is worth less than at an individual's marginal rate. Trusts can distribute losses to beneficiaries, but only if the trust meets specific tests. Get professional advice — the structure matters significantly.
How does negative gearing interact with capital gains tax?
Favourably. If you hold the property for 12+ months, you get a 50% CGT discount on the gain when you sell. Combined with negative gearing deductions during the holding period, this creates a tax-efficient wealth-building strategy. However, if CGT discounts are reduced (as proposed in some reforms), this advantage shrinks.
Should I negative gear in 2026 given the political risk?
Only with caution. Model the numbers without negative gearing and see if the deal still works. If it doesn't, the property isn't a good investment — it's a tax play. Prioritise new properties, use conservative leverage, and keep a cash buffer to survive a possible policy change.
Bottom Line
Negative gearing is a legitimate and popular strategy for Australian property investors — but it's not the free money that some commentators suggest. It's a cash-flow-negative strategy that only works if the property appreciates over time. The tax deduction softens the cash flow hit, especially for high earners, but you're still paying real money to hold the asset. Approach it as a long-term growth play, not a tax-arbitrage opportunity. Understand the 2026 policy risk. Prioritise new properties. Keep leverage conservative. And always model the deal without the tax deduction — if the numbers only work with negative gearing, they don't work.