Negative Gearing Explained for Australian Property Investors (2026)

Negative gearing is not a tax trick — it is a loss you fund hoping growth pays you back. Here is the maths, bracket by bracket.

By ECTD Editorial · Published 2026-04-16 · Updated 2026-04-16

Negative gearing is one of the most talked-about and least understood ideas in Australian property. Strip away the politics and it is simply this: when the costs of holding an investment property exceed the rent it earns, you make a loss — and the tax system lets you deduct that loss against your other income. This guide walks through exactly how that works in the 2025–26 year, what is and is not deductible, how it interacts with capital gains tax when you sell, and the risks that the brochures rarely mention.

What negative gearing actually is

"Gearing" just means borrowing to invest. A property is positively geared when the rent it produces is more than the cost of holding it — you are cash-flow positive and pay tax on the net rental profit. It is negatively geared when the deductible holding costs exceed the rent, producing a rental loss.

Australia is one of the few countries that lets individuals offset a rental loss against unrelated income — your salary, business profit or other investment earnings — in the same year the loss is incurred. That offset is the entire mechanism. It does not make a losing investment profitable; it softens the after-tax sting of the loss while you wait for the property to (hopefully) grow in value.

The core idea in one sentence: You voluntarily run a cash loss on the property each year, the tax system refunds a slice of that loss at your marginal rate, and the strategy only wins overall if capital growth eventually outweighs the after-tax holding cost.

The deductions: interest, and the purpose-of-borrowing test

The single largest deduction for most investors is loan interest. Here the rule is precise and frequently misunderstood: it is the purpose the borrowed money was used for that determines deductibility, not the asset securing the loan. Money borrowed to acquire an income-producing asset generally has deductible interest; money borrowed for private purposes does not — even if both loans are secured against the same investment property.

Two practical consequences follow. First, you can deduct the interest but never the principal repayments — repaying the loan principal is paying down your own borrowing, not an expense of earning rent. On an interest-only loan the whole repayment may be deductible; on a principal-and-interest loan only the interest portion is. Second, if you redraw against the investment loan to pay for something private (a car, a holiday), the interest on that redrawn portion stops being deductible, and you now have a "mixed-purpose" loan that is messy to apportion. Keep investment borrowings clean and separate.

Other commonly deductible holding costs

Council rates, water rates and land tax on the rented property
Building, landlord and contents insurance premiums
Property management and letting fees charged by your agent
Repairs and maintenance that return something to its original condition (a genuine repair is immediately deductible; an improvement is capital and is claimed over time)
Body corporate / strata fees for the administration fund
Interest on a loan used to fund deductible repairs or to acquire the property
Accountant or registered tax agent fees for managing the property’s tax affairs

Travel deductions were removed: From 1 July 2017, individual investors can no longer claim the cost of travelling to inspect, maintain or collect rent from a residential rental property. Flights, fuel, car hire and accommodation for property visits are not deductible. This does not affect commercial property or taxpayers carrying on a business of property investing, but it catches almost all ordinary residential landlords.

How the rental loss offsets your other income

At tax time you total the rent received, subtract every allowable deduction, and the result is your net rental position. A net loss is subtracted from your other assessable income, reducing your taxable income for the year. Because Australia uses a progressive scale, the value of that reduction depends on which tax brackets the loss sits in — and that is the detail most people get wrong.

For the 2025–26 income year the resident rates (before the Medicare levy) are:

Nil on income up to $18,200
16% on the part between $18,201 and $45,000
30% on the part between $45,001 and $135,000
37% on the part between $135,001 and $190,000
45% on the part above $190,000

On top of these, most taxpayers pay the 2% Medicare levy, so the top marginal rate including Medicare is 47%, and the $135,001–$190,000 band is effectively 39%. The critical principle: a deduction reduces your taxable income from the top down. The loss strips away your highest-taxed dollars first, then the next-highest, and so on. You therefore cannot value the saving with a single flat rate — you work it out bracket by bracket.

Why the top-down rule matters: The same $16,000 loss is worth far more to someone earning $200,000 than to someone earning $120,000, because it removes dollars taxed at 47% rather than 32%. The deduction is identical; the refund is not. Always model the saving against your actual top brackets.

Worked example 1 — $120,000 salary

Assume an investor earning $120,000 from their job buys a unit rented at $500 a week — that is $26,000 of rent for the year. Total deductible holding costs (interest, rates, insurance, management fees, strata, depreciation) come to $42,000.

Rental loss = $42,000 expenses − $26,000 rent = $16,000.
Taxable income falls from $120,000 to $104,000.
The whole $16,000 reduction sits inside the 30% bracket ($45,001–$135,000), plus the 2% Medicare levy — an effective 32%.
Tax saving = $16,000 × 32% = $5,120.
True out-of-pocket cost of the loss = $16,000 − $5,120 = $10,880 for the year.

So this investor is genuinely $10,880 worse off in cash terms across the year (before any rent shortfall already counted, since that is inside the $16,000). The tax system has refunded roughly a third of the loss. The strategy only makes sense if the property is expected to grow by clearly more than $10,880 a year after costs.

Worked example 2 — $200,000 salary

Now take an investor earning $200,000 with the identical property and the same $16,000 loss. The arithmetic looks similar but the result is meaningfully different, because the loss is being stripped from higher brackets.

Rental loss = $16,000, reducing taxable income from $200,000 to $184,000.
Only the first $10,000 of that reduction is in the top band — income above $190,000, taxed at 45% + 2% Medicare = 47%.
The remaining $6,000 falls in the $135,001–$190,000 band, taxed at 37% + 2% Medicare = 39%.
Tax saving = ($10,000 × 47%) + ($6,000 × 39%) = $4,700 + $2,340 = $7,040.
True out-of-pocket cost = $16,000 − $7,040 = $8,960 for the year.

Don’t flat-rate the saving: It is tempting to apply 47% to the whole $16,000 and write $7,520 — that is wrong, because only the part of the loss sitting above $190,000 gets the 47% rate. The correct figure is the two-bracket split: $4,700 + $2,340 = $7,040. The same error in the other direction (using 39% on everything) under-states it. Split the loss across the brackets it actually occupies.

Side by side: the identical $16,000 loss returns $5,120 to the $120,000 earner and $7,040 to the $200,000 earner. Higher earners extract more tax benefit per dollar of loss — which is exactly why negative gearing skews toward higher incomes, and why the headline "tax saving" means little until you know the investor’s own brackets.

Depreciation: a deduction with no cash leaving your pocket

A large part of many negative-gearing claims is depreciation — a non-cash deduction recognising that the building and its fittings wear out over time. It comes in two streams, and the rules differ sharply between them.

Capital works (Division 43)

This covers the structure itself — the bricks, concrete, roofing and permanent fixtures. For eligible residential properties it is generally claimed at 2.5% of the construction cost per year over 40 years. A quantity surveyor’s depreciation schedule is the usual way to substantiate the figure. Capital works deductions are powerful precisely because they require no further outlay — you claim them every year without spending anything.

Plant and equipment (Division 40) — and the 9 May 2017 change

This second stream covers removable assets: carpets, blinds, dishwashers, air-conditioners, hot-water systems and the like. From the 2017 federal budget, the rules tightened materially. For residential rental properties, where a contract to acquire the property was entered into after 7:30pm on 9 May 2017, investors can generally no longer claim depreciation on previously used (second-hand) plant and equipment — the assets that were already in the property when they bought it.

You can still depreciate plant and equipment you buy new and install yourself, and capital works deductions on the building structure are unaffected. The practical effect is that an investor buying an established home generally gets little or no plant-and-equipment depreciation on the existing fixtures, whereas a brand-new build can still carry substantial depreciation benefits.

Depreciation is partly a timing benefit: Capital works deductions reduce your tax now, but they also reduce the property’s cost base — which increases the capital gain when you eventually sell. So part of the benefit is deferral rather than a permanent saving. Worth claiming, but factor the cost-base reduction into your long-run numbers.

The payoff event: selling, and the 50% CGT discount

Negative gearing is a bet on capital growth, and the bet is settled when you sell. Capital gains tax applies to the gain — broadly the sale proceeds less the cost base. For individuals who have held the asset for more than 12 months, the 50% CGT discount applies: only half of the net capital gain is added to your taxable income and taxed at your marginal rate.

This is the part that makes the overall strategy work for many investors. Each year they deduct losses at their full marginal rate (up to 47%), and on exit they are taxed on only half the growth. There is a catch worth understanding clearly: the capital-works depreciation you claimed along the way reduces your cost base, so it lifts the assessable gain. The deduction you enjoyed earlier is partly recouped at sale — though still on the discounted, half-counted gain.

Hold longer than 12 months to access the 50% discount — selling earlier means the whole gain is taxed.
Capital works deductions claimed during ownership lower the cost base and so increase the taxable gain.
The discounted gain is added to your other income for the year of sale, which can push you into higher brackets in that one year — timing the sale matters.

Cash flow versus tax benefit: the reality check

The most common mistake is treating the tax refund as the point of the exercise. It is not. A refund of $5,120 or $7,040 does not change the fact that the property cost you $16,000 more than it earned. You are out of pocket every year — the tax system simply shares part of that loss. No one builds wealth by deliberately losing money for the deduction alone.

The honest framing is this: negative gearing makes a growth-focused investment more affordable to hold while you wait for capital appreciation. If the property grows strongly, the after-tax holding cost is dwarfed by the gain and the strategy pays off handsomely. If growth stalls, you have simply spent years funding a loss with no upside to show for it.

Two numbers to know before you buy: First, your real annual after-tax holding cost (the loss minus your bracket-by-bracket tax saving). Second, the capital growth you would need each year just to break even on that cost. If you cannot defend both numbers, the deduction is not a reason to proceed.

The risks investors underweight

Negative gearing concentrates two specific risks, and both have bitten investors hard in recent rate cycles.

Over-reliance on capital growth. The whole model assumes the property rises in value faster than the after-tax cost of holding it. Property markets do not grow in a straight line, and flat or falling periods can last years. If growth does not materialise, the deductions were just a discount on a loss you never needed to make.
Interest rate rises. Because interest is the dominant cost, rising rates hit a negatively geared investor directly — a 1–2% increase can lift annual holding costs by thousands and deepen the loss faster than the tax saving grows. Investors who bought at low rates with thin cash-flow buffers are the most exposed.
Vacancy and rent shortfalls. The model assumes the rent keeps flowing. Extended vacancy, a non-paying tenant, or a soft rental market widens the loss with no offsetting tax certainty.
Serviceability and forced sale. If your income drops or rates climb beyond your buffer, you may be forced to sell at a bad time — crystallising a loss the tax deductions can never fully recover.

None of these are reasons to avoid investing — they are reasons to size the position to your real capacity to fund the loss through a bad year, not just a good one. Run the numbers at a higher interest rate than today’s, and assume a period of vacancy, before you commit.

Bringing it together

Negative gearing is not a loophole and not free money. It is a deliberate annual loss, partly cushioned by a tax refund whose size depends on your own marginal brackets, taken in the expectation that the 50%-discounted capital gain on sale will more than repay the holding cost. Understand the interest-deductibility rules, claim depreciation correctly under the post-2017 settings, model your after-tax cost bracket by bracket, and stress-test it against higher rates and vacancy. Do that, and you can decide whether the strategy genuinely fits your situation — rather than chasing a deduction for its own sake.

To see how a rental loss changes your own take-home position across the 2025–26 brackets, plug your figures into our income tax calculator and compare the before-and-after.

General advice warning: This article is general information only and does not take into account your personal objectives, financial situation or needs. It is not personal financial or taxation advice. Tax outcomes depend on your individual circumstances and the law as it applies to you, and rules can change. Before acting, you should seek advice from a licensed financial adviser and a registered tax agent or accountant.

General information only — not personal financial, tax, legal or medical advice. Consider your own situation and consult a licensed professional before acting. Figures are current as at the date shown above.