Negative gearing in Australia: how it works for investors

Negative gearing is one of the most searched and misunderstood property investment concepts in Australia. Most of the noise around it is political. Here’s what actually matters for your finances.This guide explains how negative gearing works, walks through a realistic worked example with current 2026 numbers, covers every expense you can claim, and addresses the proposed reforms that could change the rules. Over 25 years, we’ve structured hundreds of investment property loans. We’ve seen what the numbers mean in practice. That’s why we’re writing this from a broker’s perspective, not a bank’s marketing page.

What is negative gearing?

On this page ▾

• How does negative gearing work? (worked example)
• What expenses can you claim on a negatively geared property?
• How negative gearing affects your borrowing capacity
• Is negative gearing worth it? Pros and cons
• Proposed 2026 changes to negative gearing
• How a mortgage broker can help with negative gearing strategy
• FAQ: negative gearing in Australia

Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates. The “loss” is the gap between what you earn in rent and what you pay in loan interest, property management fees, maintenance, insurance, and other expenses. You can deduct this loss from your other taxable income, including your salary.In practical terms: if your investment property costs you $45,000 per year to hold but only earns $38,000 in rent, you have a $7,000 net rental loss. That $7,000 reduces your taxable income, which means you pay less tax.The Australian Taxation Office (ATO) allows this deduction because the property is an income-producing asset. You are borrowing to earn income, and the expenses incurred in earning that income are deductible — even when they temporarily exceed the income itself.

Negative gearing vs positive gearing

The difference is straightforward. A negatively geared property costs you more to hold than it earns in rent. A positively geared property earns more in rent than it costs to hold.

	Negatively geared	Positively geared
Rental income vs expenses	Expenses exceed income	Income exceeds expenses
Cash flow	Negative (you top up)	Positive (property pays for itself)
Tax impact	Reduces your taxable income	Adds to your taxable income
Typical strategy	Capital growth focus	Cash flow focus
Common property type	Higher-value, lower-yield suburbs	Regional, higher-yield areas

Neither strategy is inherently better. The right approach depends on your income, tax bracket, investment timeline, and risk tolerance. Many experienced investors hold a mix of both — using positively geared regional properties to offset the holding costs of negatively geared growth assets in capital cities.One thing to keep in mind: a negatively geared property does not stay negatively geared forever. As rents rise over time (and as you pay down the loan, reducing interest costs), many properties transition from negative to positive gearing within 5–10 years.

How does negative gearing work? (worked example)

The numbers make this clearer. Here’s a 2026 example with realistic figures.

Cash flow breakdown: a $650,000 investment property

Assume the following scenario:

• Purchase price: $650,000
• Loan amount: $520,000 (80% LVR)
• Interest rate: 6.30% (interest-only)
• Weekly rent: $550 ($28,600/year)
• Your marginal tax rate: 37% ($135,001–$190,000 bracket)

Annual income:

Item	Amount
Gross rental income	$28,600

Annual expenses:

Item	Amount
Loan interest (6.30% on $520,000)	$32,760
Property management fees (7.5% of rent)	$2,145
Council rates	$1,800
Water rates	$1,100
Strata levies	$2,400
Landlord insurance	$1,200
Maintenance allowance	$1,500
Depreciation (building + fixtures)	$8,500
Total expenses	$51,405

Tax deduction calculation step by step

1. Calculate net rental loss: $28,600 (income) − $51,405 (expenses) = −$22,805
2. This $22,805 loss is deducted from your salary income
3. At the 37% marginal tax rate, tax saved: $22,805 × 0.37 = $8,438
4. Actual out-of-pocket cash loss (excluding depreciation, which is non-cash): $22,805 − $8,500 = $14,305
5. After tax refund: $14,305 − $8,438 = $5,867 net annual cost

So this property costs roughly $113 per week after tax to hold. That is the real cost of negative gearing — not the gross loss figure, but the after-tax, after-depreciation weekly outlay.Whether $113 per week is worth it depends on how much the property grows in value. At 5% annual capital growth, a $650,000 property increases by $32,500 in year one. Subtract your $5,867 net holding cost and you are ahead by roughly $26,600 — on paper, at least, before selling costs and capital gains tax.

What expenses can you claim on a negatively geared property?

The ATO allows deductions for any expense incurred in earning rental income. They’re split across interest, depreciation, and everything else. Quick note before we list them: most investors miss at least one deductible expense. Usually it’s depreciation. Make sure your tax agent isn’t overlooking it either.

Interest repayments

Loan interest is almost always the largest deductible expense. For an investment property loan, you can claim the interest component of your repayments — but not the principal. This is one reason interest-only loans are common among property investors in the early years: the entire repayment is deductible.If your loan is split between investment and personal use (for example, a line of credit that also funded a holiday), only the portion used for the investment property is deductible. Keep clear records.

Depreciation and capital works

Depreciation is a non-cash deduction — you claim it without spending a dollar. There are two types:

• Capital works deduction (Division 43): The building structure itself depreciates at 2.5% per year for properties built after 1985. On a property with $300,000 in construction costs, that is $7,500 per year.
• Plant and equipment (Division 40): Fixtures and fittings like carpet, blinds, hot water systems, air conditioners, and appliances depreciate over their effective life. These deductions are largest in the first few years and taper off.

A quantity surveyor prepares a depreciation schedule for your property, typically costing $600–$800. That fee is also deductible. For a property with reasonable fixtures, the depreciation schedule often delivers $8,000–$12,000 in deductions in year one alone. It is one of the most overlooked deductions in property investing.

Other deductible expenses

Beyond interest and depreciation, you can claim:

• Property management fees
• Council and water rates
• Strata or body corporate levies
• Landlord insurance
• Repairs and maintenance (not improvements — there is a difference)
• Pest inspections
• Legal expenses for lease preparation
• Travel to the property for inspections (limited — check current ATO rules)
• Advertising for tenants
• Tax agent fees for the rental portion of your return

The full list is on the ATO website under “Rental properties — expenses you can claim.” We recommend keeping every receipt and using a registered tax agent who specialises in investment property.One expense that catches investors off guard: initial repairs on a newly purchased property. If you buy a property and fix existing damage before renting it out, the ATO generally treats those as capital improvements (claimable over time via depreciation) rather than immediate deductions. The distinction between “repair” and “improvement” matters — get advice before assuming a renovation is fully deductible in year one. Similarly, the stamp duty costs when purchasing an investment property are not immediately deductible. They form part of the cost base for CGT purposes and reduce your capital gain when you eventually sell.

How negative gearing affects your borrowing capacity

A bank explains what negative gearing is. We focus on how it affects your borrowing capacity, which matters if you’re building a portfolio.Lenders assess rental income conservatively. Most use 80% of the gross rent (called “rental shading”) when calculating serviceability. So if your property earns $550 per week, the lender counts $440. Meanwhile, they assess the loan repayment at a stress-test rate — currently around 8.5–9.0%, regardless of your actual rate.Result: a negatively geared property can reduce your borrowing capacity for your next purchase. The rental income doesn’t fully offset the loan repayment in the lender’s model.To put a number on it: using the worked example above, the lender would count $440/week in rental income (80% of $550) but assess the $520,000 loan at roughly $780/week (stress-tested at ~8.75%). That is a $340/week negative gap in their serviceability calculation, which directly reduces what you can borrow next.However, a few things can help:

• Tax benefit recognition: Some lenders add back the tax benefit from negative gearing when assessing your income. This improves your serviceability. Not all lenders do this — which is why lender selection matters.
• Interest-only structuring: Using an interest-only property loan for the investment loan while paying principal and interest on your home loan reduces total assessed repayments.
• Loan structuring: Keeping investment and personal debt separate, using offset accounts strategically, and choosing the right repayment type all affect how much you can borrow next. This is where an experienced broker adds value.

We have access to 52+ lenders, and their serviceability calculators differ significantly. The difference between the most generous and most restrictive lender can be $80,000–$150,000 in borrowing capacity on the same income. If you are serious about building a property portfolio, lender selection is not optional — it is a strategy.

Is negative gearing worth it? Pros and cons

The honest answer: it depends on your individual situation. Here is a clear breakdown.Advantages:

• Reduces your taxable income, which lowers your annual tax bill
• Makes it more affordable to hold growth-focused properties in the early years
• Depreciation provides a deduction without actual cash outlay
• Capital growth over the medium to long term can significantly outweigh holding costs
• The 50% CGT discount (for properties held over 12 months) amplifies after-tax returns on sale

Disadvantages:

• You are still out of pocket each week — negative gearing is not “free money”
• The tax benefit is proportional to your marginal rate. At the 19% bracket, the refund is small. At 45%, it is substantial.
• If the property does not grow in value, you have lost real money
• Vacancy periods eliminate rental income but expenses continue
• Interest rate rises increase your holding costs and deepen the loss
• Policy changes could reduce or remove the deduction (see the next section)

There is also a timing consideration. The higher your marginal tax rate, the more valuable negative gearing becomes. An investor earning $160,000 (37% bracket) gets $8,438 back on a $22,805 loss. An investor earning $50,000 (19% bracket) gets only $4,333 on the same loss. Same property, very different outcomes.A common mistake: buying a property purely for the tax deduction. The tax benefit softens the holding cost, but it does not create wealth on its own. The property itself needs to be a sound investment — right location, strong rental demand, and realistic growth prospects.When we work with clients, we focus on the total return picture: rental yield, capital growth potential, holding cost after tax, and how the property fits into their broader investment property ownership structure. We alsorecommend the use of a data-driven property investing approach to assess suburb-level fundamentals before recommending any strategy.

Proposed 2026 changes to negative gearing

Negative gearing has been a political issue in Australia for decades. As of April 2026, the federal government has signalled potential changes as part of the upcoming 2026–27 budget. Search volume for “negative gearing” has surged 236% since early 2026, driven by budget speculation.Nothing has been legislated yet. But the proposals being discussed include:

• Capping the number of properties that can be negatively geared (most commonly discussed: a limit of one or two investment properties)
• Limiting deductions to rental income only — meaning losses could no longer be offset against salary or wages
• Reducing the CGT discount from 50% to 33% — which would increase the tax payable when you eventually sell an investment property
• Grandfathering existing arrangements — investors who already own negatively geared properties would keep current rules, but new purchases would face restrictions

What would happen if negative gearing is abolished?

This is one of the most asked questions in Australian property right now. Based on past precedent and economic modelling:

• Short-term rental market disruption. If investors sell, rental supply tightens. When negative gearing was removed in 1985, rents rose in Sydney and Perth before the policy was reversed in 1987. Economists debate the cause — some argue existing low vacancy rates in those cities were the real driver, not the policy change itself. Rents in Brisbane and Adelaide actually fell over the same period.
• Reduced investor activity. Higher after-tax holding costs would make some properties unviable, particularly in low-yield, high-growth suburbs.
• Potential price correction in investor-heavy markets. Apartments and units in oversupplied areas would be most exposed.
• Minimal impact on established homeowners. Negative gearing applies to investment property, not owner-occupied housing. The direct effect on home prices is debated — most economists expect a limited impact.

What this means for property investors

If you are considering an investment property purchase in 2026, the uncertainty matters — but it should not paralyse you.Here’s what we’d tell a client sitting across from us right now:If changes are grandfathered (which is the most likely scenario based on past policy patterns), properties purchased before the new rules take effect would retain full negative gearing benefits. Waiting could mean missing the grandfathering window.If changes are not grandfathered, the fundamentals of property investing do not disappear. Rental yields, capital growth, and depreciation still exist. The tax treatment changes, but the asset class does not.For full detail on the 2026 Budget changes to negative gearing, including the 12 May cut-off, new-build carve-out, and what lenders are doing right now, see our dedicated guide.

How a mortgage broker can help with negative gearing strategy

A bank gives you a loan. A broker gives you a strategy.When we work with investment property clients, we look at the complete picture:

• Loan structure: Should the investment loan be interest-only or principal and interest? What term? Should we split the loan?
• Lender selection: Which of our 52+ lenders will recognise your rental income most generously? Which will add back the tax benefit?
• Portfolio planning: How does this property fit with your existing debt? Can you use equity from your home to buy an investment property?
• Cash flow modelling: What is your actual weekly cost after tax? Can you sustain it if rates move or the property sits vacant for a few weeks?
• Ownership structure: Should you buy in your name, your partner’s name, or a trust? This has long-term tax and asset protection implications.

We have been helping Australians finance investment properties since 2001. Our tech-driven approach means we can run these scenarios quickly and show you the numbers — not just the theory.One example: a recent client came to us after their bank told them they could not borrow for a second investment property. By restructuring their existing loan and placing the new purchase with a different lender that treated rental income more favourably, we secured the approval. Same income, same property — different lender, different result. That is the kind of outcome a broker delivers that a single bank cannot.Ready to explore your options? Speak to a mortgage broker at Mortgage World Australia.

FAQ: negative gearing in Australia

Is there still negative gearing in Australia?Yes — fully available as of April 2026. You can still deduct net rental losses against your salary and wages. The federal government has flagged potential changes in the 2026–27 budget, but nothing has been legislated yet. We cover the proposed reforms in detail above.Is Australia the only country with negative gearing?No, but Australia is one of the few countries where rental losses can be offset against all other income without restriction. New Zealand removed negative gearing for residential property in 2021, though the incoming government reversed this in 2023. The UK limits mortgage interest deductions to a basic-rate tax credit. Canada and the US allow rental loss deductions but with tighter caps.Can I negatively gear shares or other investments?Yes. Negative gearing applies to any income-producing investment, not just property. If you borrow to invest in shares or managed funds and the interest costs exceed your dividend income, you can claim the loss as a tax deduction. The same principle applies: the investment must be income-producing, and expenses must be genuinely incurred.Does negative gearing affect my borrowing capacity?It can, in both directions. Lenders assess your rental income conservatively (usually at 80% of gross rent) against the loan repayment. A negatively geared property adds to your assessed expenses, which can reduce how much you can borrow for your next purchase. However, the tax refund from negative gearing improves your after-tax cash flow, which some lenders factor back in. Lender selection makes a real difference here — talk to a broker.Can I negatively gear a property I live in?No. Negative gearing only applies to investment properties that generate rental income. Your owner-occupied home is not an income-producing asset, so mortgage interest and expenses on it are not tax-deductible. If you move out and rent the property to tenants, it becomes an investment, and negative gearing may apply from that point.How do I claim negative gearing on my tax return?Report your rental income and expenses in the rental property section of your individual tax return. If total expenses exceed total income, the net loss automatically reduces your taxable income. You need records of all income received and expenses paid. The ATO recommends using a registered tax agent for investment property returns. If you want to explore SMSF property investment, the tax treatment is different — seek specialist advice.

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Patrick O’Brien, Director and Home Loan Specialist since 2001 — Mortgage World AustraliaDisclaimer: This article provides general information only and does not constitute financial, tax, or legal advice. Tax laws are subject to change — the information in this article is current as of April 2026, but may be affected by upcoming legislation. Always seek independent tax advice from a registered tax agent or financial adviser for your specific situation. The Australian Taxation Office (ATO) is the authoritative source for tax deduction rules. Mortgage World Australia has access to 52+ lenders. Credit criteria, fees, terms and conditions apply.