How Negative Gearing Works in Australia (2026 Guide)
Negative gearing is one of Australia's most widely used property investment strategies — but what actually is it, how do you calculate the benefit, and is it worth it? Here's a plain-English explanation with real numbers.
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Open Negative Gearing CalculatorWhat Is Negative Gearing?
A property is negatively geared when the annual costs of owning it exceed the rental income it generates. The most common cost is loan interest — when you borrow to buy an investment property, the interest you pay each year is typically the single largest expense.
The defining feature of Australia's negative gearing rules is that this loss is deductible against your other income — usually your salary. So if your investment property runs at a $15,000 annual loss and your salary is $120,000, you only pay income tax on $105,000. At a 32% marginal rate, that's a $4,800 tax saving.
Step-by-Step Calculation
Here's how to calculate whether a property is negatively geared and what the tax benefit is:
Example: $650,000 property, Sydney
In this example, the investor pays $286/week out of pocket after receiving the tax refund at year end. If the property grows at 5% per year, that $650,000 property appreciates by $32,500 in year one — well above the holding cost.
The 2026 Tax Brackets
Your tax saving from negative gearing depends entirely on your marginal tax rate. The 2025-26 Australian rates (including the 2% Medicare levy) are:
A nurse earning $90,000 on the 32% rate gets back 32 cents for every dollar of property loss. A senior manager on $160,000 (39% rate) gets back 39 cents. The higher your income, the more the tax system subsidises your holding costs — but you also have more to lose if the strategy goes wrong.
The Role of Depreciation
Depreciation is the investor's secret weapon: it increases your deductible loss without any actual cash outlay. There are two types:
Capital Works (Division 43)
The building structure depreciates at 2.5% of construction cost per year. Available on residential buildings constructed after 17 July 1985. On a new $500,000 build with $300,000 construction cost, that's $7,500/year in deductions.
Plant & Equipment (Division 40)
Fixtures and fittings — carpets, appliances, blinds, hot water systems — depreciate at their effective life rates. For new properties (or new assets you installed), a depreciation schedule typically adds $3,000–$10,000+ in deductions in early years.
Get a quantity surveyor's depreciation schedule before lodging your first rental tax return. They cost $400–$800 and are themselves tax deductible.
Pros and Cons
Pros
- Tax refund reduces your real holding cost
- Allows you to own a higher-quality asset with less cashflow
- Depreciation boosts deductions without cash outlay
- Capital growth can far exceed annual losses
- Strategy gets better as rent increases over time
Cons
- Negative cashflow requires weekly out-of-pocket contributions
- Relies on capital growth — no guarantee
- Rising interest rates can deepen losses quickly
- Policy risk — reforms are now law and restrict wage offsets for established properties from 1 July 2027
- Must fund shortfall even if property is vacant
When Does Negative Gearing Make Sense?
Negative gearing is generally a sound strategy when:
- You're on a marginal tax rate of 32% or above — the tax subsidy is meaningful
- The property is in a location with strong historical capital growth
- You have stable income and cash reserves to cover the weekly shortfall and unexpected vacancies or repairs
- The property has good depreciation potential (newer build or recent renovations)
- You have a long investment horizon (10+ years) to allow capital growth to compound
It makes less sense when you need immediate income, are on a low marginal rate, or are buying in a market with poor capital growth prospects.
Common Mistakes to Avoid
- Buying purely for the tax benefit: The tax refund reduces your loss — it doesn't eliminate it. The property still needs to be a good investment.
- Not stress-testing for rate rises: Model your cashflow at interest rates 1–2% higher. If it becomes unaffordable, reconsider the deal.
- Skipping the depreciation schedule: This is leaving money on the table.
- Confusing repairs and improvements: Capital improvements must be depreciated, not immediately deducted.
- Not keeping records: The ATO requires documentation for all claimed expenses. Use a dedicated account for the property.
Calculate Your Exact Numbers
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Frequently Asked Questions
Negative gearing is when the costs of owning an investment property — including loan interest, maintenance, rates, and other expenses — exceed the rental income it produces. The resulting annual loss can be deducted from your other taxable income (like your salary), reducing your total tax bill. The ATO allows this offset because the property is held to produce assessable income. From 1 July 2027 this offset against wages is restricted for established properties bought after 12 May 2026, though the rules described here still apply for the 2026-27 financial year.
The tax saving equals your annual property loss multiplied by your marginal tax rate. For example: a $20,000 loss at a 39% marginal rate saves $7,800 in tax per year. A $15,000 loss at 32% saves $4,800. The higher your income (and thus your marginal rate), the larger the tax saving — but this also means you need stronger capital growth to justify the ongoing losses.
Negative gearing is generally worthwhile if: (1) you expect strong capital growth that outweighs the annual losses over time, (2) the tax refund meaningfully reduces your out-of-pocket holding costs, and (3) you have the cash flow to cover the shortfall each week. It is not a strategy by itself — it's a tax treatment that reduces the cost of holding a property while you wait for capital growth.
Negative gearing: rental income is less than expenses, creating a tax-deductible loss. Positive gearing: rental income exceeds all expenses, generating taxable profit. Neutral gearing: income equals expenses, no net profit or loss. Positively geared properties produce immediate income but have lower capital growth prospects on average. Negatively geared properties trade short-term cashflow for long-term capital growth.
Yes, but the negative gearing benefit is smaller than with an interest-only loan, because principal repayments are not tax deductible. Only the interest component is deductible. With a P&I loan, your interest portion shrinks each year as you pay down principal, which gradually reduces the deductible amount and can move the property towards neutral or positive gearing over time.
Yes — depreciation is a non-cash deduction that increases your property loss without any actual cash outlay. Capital works (Div 43) lets you deduct 2.5% of the building's construction cost per year. Plant and equipment (Div 40) lets you depreciate fixtures and fittings. For a new property, depreciation deductions can easily add $5,000–$15,000+ to your annual loss, significantly boosting the tax refund.
Disclaimer
This guide is for general information only and does not constitute financial or tax advice. Always consult a qualified accountant or financial adviser before making property investment decisions.