Negative Gearing: How It Actually Works

Updated March 2026 · FY 2025–26 rates · 7 min read

JBy Jarrod, Editor · See editorial standards

Negative gearing is one of the most talked-about — and misunderstood — tax strategies in Australia. Around 1.3 million Australians negatively gear at least one investment property. Here's how it actually works, who benefits most, and whether it makes sense for you.

Budget 2026-27 update (13 May 2026): negative gearing is changing from 1 July 2027. The Government announced that from 1 July 2027, negative gearing on established residential property will be limited to new builds. Losses on newly-acquired established property will no longer offset wages or salary — they'll carry forward to offset future rental income or capital gains on the same property. Properties owned at 7:30pm AEST on 12 May 2026 (Budget night) are fully grandfathered. New builds keep full negative gearing regardless of acquisition date. The 50% CGT discount is also being replaced with CPI-based indexation + 30% minimum tax on real gains from 1 July 2027. The rules in this article reflect the current FY 2025-26 system. Full Budget breakdown: Federal Budget 2026-27.

What Is Negative Gearing?

Negative gearing simply means your investment property costs more to own than it earns in rent. The "negative" part is the loss — and in Australia, that loss can be deducted from your other income (like your salary), reducing the tax you pay.

For example, if your investment property earns $25,000/year in rent but costs $35,000/year in mortgage interest, rates, insurance, maintenance, and depreciation, you have a $10,000 loss. If your marginal tax rate is 30%, that loss saves you $3,000 in tax.

What Expenses Can You Claim?

The ATO allows a wide range of deductions on investment properties. The most significant are:

Mortgage interest — the interest portion of your loan repayments (not the principal). This is typically the largest deduction, often $20,000–$40,000+ per year on a standard investment loan.

Depreciation — this is the hidden gem. Capital works deduction (2.5% of construction cost per year for properties built after 1987) and plant and equipment depreciation (appliances, carpets, blinds) can add $5,000–$15,000+ per year in deductions without costing you a cent in cash. Get a quantity surveyor's depreciation schedule — it typically pays for itself many times over.

Other deductible expenses include council and water rates, landlord insurance, property management fees (typically 7-10% of rent), repairs and maintenance, strata fees, and advertising for tenants.

Who Benefits Most?

Higher income earners get the biggest tax benefit per dollar of loss. At a 45% marginal rate ($190,000+ income), every $1,000 of property loss saves $450 in tax. At a 30% marginal rate ($45,001–$135,000), it saves $300. At the 16% rate, only $160.

This is why negative gearing is often described as a strategy that benefits higher earners more. The loss is the same, but the tax refund is bigger when your marginal rate is higher.

The Catch: You're Still Making a Loss

Negative gearing reduces your tax, but it doesn't eliminate your loss. If your property costs $10,000 more per year than it earns, and the tax benefit is $3,000, you're still out of pocket $7,000 per year. The strategy only works if the property's capital growth over time exceeds your accumulated after-tax losses.

This is the bet you're making: that the property will grow in value enough to more than cover the years of losses. In most Australian capital cities, long-term property growth has historically averaged 5-7% per year, which typically justifies the holding costs. But it's not guaranteed.

Calculate Your Negative Gearing Benefit

See your tax saving, true after-tax cost, and expense breakdown.

Open Negative Gearing Calculator →

When you eventually sell, you'll pay capital gains tax on the profit — use our CGT Calculator to estimate that. And to see how the property fits into your overall financial picture, try the Financial Snapshot.