Last updated: May 2026.
Negative Gearing Explained: How It Works in Australia 2026
Negative gearing is one of the most misunderstood investment strategies in Australia, yet it remains a powerful tool for property investors seeking to maximize tax benefits. If you're considering an investment property or already own one, understanding how negative gearing works and whether it's right for your financial situation is essential.
What Is Negative Gearing?
Negative gearing occurs when the costs of owning an investment property exceed the income it generates. In other words, your expenses outweigh your rental income, resulting in an annual loss. Rather than viewing this as a failure, savvy Australian investors recognize it as an opportunity to claim tax deductions that can significantly reduce their overall taxable income.
When you negatively gear a property, you're essentially using the loss to offset other income such as your salary or business profit which lowers your total taxable income and, consequently, your tax bill.
How Negative Gearing Works: The Mechanics
Here's how the process works in practice:
Example: You own an investment property with:
- Rental income: $24,000 per year
- Mortgage interest: $28,000 per year
- Property management: $1,500 per year
- Council rates and water: $2,100 per year
- Insurance: $1,200 per year
- Maintenance: $1,500 per year
- Total annual expenses: $34,300
Your annual loss is $10,300 ($24,000 income, $34,300 expenses). You can claim this $10,300 as a deduction against your other income.
Tax saving depends on your marginal tax rate:
| Annual Income | Marginal Tax Rate (2025-26) | Tax Saving on $10,300 Loss |
|---|---|---|
| $18,200 to $45,000 | 21% (inc. Medicare Levy) | $2,163 |
| $45,001 to $120,000 | 39% (inc. Medicare Levy) | $4,017 |
| $120,001 to $180,000 | 45% (inc. Medicare Levy) | $4,635 |
| $180,001+ | 49% (inc. Medicare Levy) | $5,047 |
If you earn $80,000 per year and negatively gear a property by $10,300, your effective taxable income drops to $69,700, saving you approximately $4,000 in tax. Your actual out-of-pocket loss decreases from $10,300 to around $6,300 the shortfall is partially bridged by the tax saving. Sense-check the repayment side of the equation with our loan repayment calculator.
Deductible Expenses: What Can You Claim?
The ATO allows you to claim a wide range of expenses associated with earning investment income. Deductible expenses include:
- Mortgage interest (not principal repayments)
- Property management fees
- Council rates, water, and sewerage charges
- Insurance (landlord, building, and public liability)
- Maintenance and repairs
- Depreciation on plant and equipment (Division 40)
- Depreciation on building and capital works (Division 43)
- Pest control and strata levies (if applicable)
- Accountancy and legal fees related to the property
- Advertising for tenants
Important: Capital improvements (new roof, extensions, renovations) are generally not deductible; they're added to the cost base of the property.
Depreciation: A Powerful Tax Deduction
Depreciation is one of the most valuable and often overlooked deductions available to property investors. The ATO allows you to claim:
- Division 40 (Plant & Equipment): Appliances, carpets, curtains, and other chattels with a lifespan of 5 to 40 years. Second-hand items purchased before 1 July 2017 are excluded; only new items or those purchased after 1 July 2017 qualify.
- Division 43 (Capital Works): The building structure itself, calculated at 2.5% per annum of the construction cost (subject to building construction date rules). This applies to residential and commercial buildings.
A quantity surveyor prepares a detailed depreciation report identifying claimable items and calculating deductions. Cost: $350 to $700. Many quantity surveyors offer cost guarantees: they promise the deductions they identify will exceed the report cost, or they refund the difference.
For a $500,000 property, depreciation deductions typically range from $5,000 to $15,000 annually, depending on the age and condition of fixtures and fittings.
Negative Gearing vs. Positive Gearing
Negative gearing focuses on tax efficiency and capital growth. You accept rental losses because:
- You benefit from immediate tax deductions
- You expect the property to appreciate over time
- You can service the shortfall from other income
Positive gearing focuses on cash flow. Your rental income exceeds expenses, generating surplus cash. Tax is payable on this profit, but you receive positive monthly cash flow. Positive gearing appeals to investors nearing retirement who prioritize income over growth.
Neither strategy is inherently superior; it depends on your financial situation, investment timeline, and risk tolerance.
Capital Gains Tax and the 50% Discount
Negative gearing strategy often pairs with the capital gains tax (CGT) 50% discount. When you sell an investment property held for 12+ months, you only include 50% of the gain in your taxable income.
Example: You purchase a property for $500,000 and sell it five years later for $700,000. Your capital gain is $200,000. With the 50% discount, only $100,000 is included in your taxable income. At a 39% marginal tax rate, your CGT bill is approximately $39,000 (not $78,000).
This discount incentivizes long-term property investment and pairs strategically with negative gearing to create tax-efficient wealth accumulation.
When Does Negative Gearing Make Sense?
Negative gearing is most effective when:
- You have other income to offset losses (salary, business profit)
- Your marginal tax rate is 30% or higher
- You can comfortably service the cash shortfall without stress
- You expect the property to appreciate over 10+ years
- You have sufficient equity or savings to cover unexpected costs
Avoid negative gearing if:
- You have limited other income (tax deductions provide minimal benefit)
- You cannot afford the monthly shortfall
- Interest rates are rising and serviceability is tight
- You're purchasing in a stagnant property market
Common Mistakes to Avoid
- Overestimating tax savings. A $10,000 loss doesn't eliminate $10,000 in tax; it eliminates a percentage based on your marginal rate.
- Ignoring cash flow. Can you genuinely afford the shortfall? Many investors underestimate ongoing costs.
- Chasing depreciation alone. Depreciation deductions are valuable, but don't buy a property solely for tax benefits.
- Neglecting capital growth. Negative gearing only works if the property appreciates. In flat markets, you're simply losing money.
- Failing to review strategy. Market conditions change. Regularly review whether your property still aligns with your investment goals.
How Negative Gearing Affects Borrowing Power
Lenders assess serviceability by comparing your income to your total debt obligations including the investment property mortgage. Negative gearing reduces your borrowing capacity because the loss is treated as additional liability, not income.
If you earn $100,000 and negatively gear a property by $15,000, lenders may calculate your serviceability using $85,000 income for lending assessment purposes. This limits your capacity to borrow for your primary residence or additional investments. Sense-check this with our borrowing power calculator before adding a second property.
Related guides from RyRo Loan Centre
For a fuller picture of property investing strategy:
- SMSF property investment guide 2026, buying through super where negative gearing rules differ.
- Buying property in a trust: pros, cons and loan options, the structure that changes who claims the loss.
- Granny flat loans Australia, the cheapest way to add a second negatively-geared income stream to your existing block.
- Contact us to start a structure review.
Can I claim negative gearing losses against other investments? Yes. Losses from one investment property can offset gains from another property or investment. However, capital losses cannot offset capital gains; they're carried forward indefinitely or offset against future capital gains.
What if I have a capital loss when I sell? Capital losses are carried forward indefinitely to offset future capital gains. You cannot use capital losses to reduce other taxable income.
Does negative gearing affect my credit rating? Not directly. However, if you fail to meet loan repayments due to cash flow stress, defaults will damage your credit rating. Ensure serviceability is comfortable before committing.
How long should I hold a negatively geared property? Ideally, 10+ years. This allows time for appreciation to offset rental losses and positions you to benefit from the CGT 50% discount (12+ month requirement).
Should I pay down the mortgage or claim depreciation? Both provide value. Paying down principal builds equity; depreciation deductions reduce tax. A balanced approach is prudent. Consult a tax accountant for your specific situation.
Is negative gearing still viable after the 2017 depreciation changes? Yes. Division 43 (building depreciation) remains claimable. Division 40 changes only affect second-hand chattels. For properties with modern appliances and fixtures, depreciation remains significant.
How do I calculate my depreciation claim? Engage a qualified quantity surveyor. They inspect the property, identify claimable items, and calculate deductions based on asset life and construction cost.
Next Steps
If negative gearing aligns with your financial situation and investment goals, the next step is to consult with a mortgage broker who understands investment property serviceability, and a tax accountant who can quantify your specific tax benefits. At RyRo Loan Centre, we help investors understand how negative gearing impacts borrowing power and structure loans to maximize tax efficiency.
Ready to explore investment property options? Schedule a strategy call with our team today. We'll assess your situation, discuss negative gearing implications, and help you make an informed investment decision.
Related reading
Most negative gearing strategies pair well with two related plays for Hills District investors: turning your mortgage into a tax deduction with debt recycling, and using your home equity to buy an investment property in Sydney.
Ready to model your numbers?
The right structure (personal, joint, trust, SMSF), the right deposit and LVR, and accurate depreciation can move your annual tax saving by $5,000 to $15,000+. RyRo Loan Centre structures investor finance across investment loans, trust loans, and SMSF property purchases.
Schedule a strategy call or run the numbers in our borrowing power calculator.
Last updated: May 2026
Quick answers
Frequently asked questions
Yes. Negative gearing remains a standard feature of Australian tax law for residential and commercial investment properties, and for shares. Periodic political proposals to limit it have not become law. Investors can continue to deduct net rental losses (interest, depreciation, running costs minus rent) against their other income at their marginal tax rate.
At a 39% marginal tax rate (incomes from $45,001 to $135,000), a $50,000 net rental loss saves about $19,500 in tax. At a 47% top marginal rate (incomes above $190,000), the saving is about $23,500. The actual cash benefit is the tax saving minus the out-of-pocket loss you funded during the year.
Yes, but the deduction does not flow to the individual the way it does with a personal investment. A discretionary trust loss is trapped inside the trust until the trust generates income, at which point the loss reduces the future income. Unit trusts can pass losses through to unit holders if a Family Trust Election is in place. See our buying property in a trust guide for the structures.
When rent rises above the sum of interest, depreciation, and running costs. This usually happens 5 to 15 years into ownership, sooner if rates fall, longer if you borrowed at high LVR. Once a property turns positive, the tax saving disappears and you pay tax on the surplus rental income at your marginal rate.
Yes. Interest on a margin loan used to buy income-producing shares is tax-deductible. If the borrowing costs and dividends produce a loss, that loss reduces your other taxable income. Australian dividend imputation (franking credits) makes the maths a little different from property but the principle of negative gearing is the same.
Different strategies, neither is universally better. Negative gearing relies on capital growth to compensate for the cash-flow shortfall and is most efficient for high-income earners in capital cities. Positive cash-flow property suits investors who want income and lower-risk holdings, often in regional areas. Many serious investors hold a mix.
Only if the property is bought as an investment, not as the principal place of residence. Some first home buyers use "rentvesting" (renting where they want to live, buying an investment property where they can afford) to access negative gearing while still being on the property ladder. This forfeits FHBAS and FHOG eligibility in most cases.
Depreciation is a non-cash deduction (no money leaves your account) that often turns a marginal cash position into a strongly negative tax position. New properties have the highest depreciation in early years. A quantity surveyor's depreciation schedule typically costs $600 to $800 and unlocks $5,000 to $15,000 per year in deductions for new builds.
The loss carries forward against future income from the property and against future personal income. There is no "use it or lose it" deadline. Most investors plan for the loss to absorb against high-income years and reduce as the property turns positive.
The ATO data-matches rental income against property manager reports, cross-checks interest deductions against lender reports, and runs random audits on quantity surveyor depreciation schedules. Keep all invoices, settlement statements, lender annual statements, and the QS schedule for at least 5 years.
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