How Negative Gearing Works in Australia (2026 Guide)

What 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:

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:

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

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.