Negative Gearing Australia: What It Is, How It Works, and Whether It Still Makes Sense in 2026

Negative gearing is the most politically contested tax policy in Australian property investment. It has survived multiple reform attempts, been the subject of election campaigns, and been blamed simultaneously for making housing unaffordable and for making investment property viable. It has also been fundamentally misunderstood by most of the people debating it.

This guide explains what negative gearing actually is, how the maths works in practice, what it is worth at different income levels, and whether the case for it holds up at 2026 interest rates — before the rule changes planned for 2027 take effect.

A property investment is negatively geared when the costs of owning it exceed the income it generates. Specifically: when the deductible expenses — interest payments, property management fees, rates, insurance, repairs, and depreciation — are greater than the rental income received.

The loss generated by this shortfall is called a tax loss. Under Australian tax law, this tax loss can be offset against other income — primarily your salary or wages — reducing your total assessable income and therefore your income tax liability.

Simple example:
Annual rental income: $28,000
Annual deductible expenses: $42,000 (interest $32,000 + other costs $10,000)
Net tax loss: $14,000
Tax saving at 47% marginal rate: $6,580

The investor in this example is paying $14,000 more per year than the property earns — but recovering $6,580 of that from the ATO through a reduced tax bill. The net out-of-pocket cost after tax is $7,420, not $14,000.

This is the core of negative gearing: the government is effectively subsidising part of the cost of owning a loss-making investment property, in exchange for the investor taking on the risk and capital appreciation bet that comes with property ownership.

Negative gearing makes economic sense under one condition: the capital growth of the property exceeds the after-tax cost of the annual losses over the holding period.

If you are losing $7,420 per year after tax (as in the example above) but the property is growing in value by $40,000 to $50,000 per year, the investment is profitable even though it is cash flow negative. You are trading current income for future capital gain — a trade that is particularly attractive if your marginal tax rate is high, because the tax deductions reduce the cost of that trade.

The strategy is most powerful for:

High-income earners. At a 47% marginal rate, every $1 of deductible losses saves $0.47 in tax. At 32.5%, the same dollar saves only $0.325. The higher your income, the more the government subsidises your investment loss.

Growth markets. Negative gearing only works if the capital appreciation justifies the ongoing losses. In markets with weak or no growth, carrying an annual cash flow loss without a corresponding gain is simply losing money.

Investors in accumulation phase. Negative gearing generates tax refunds that can be used to fund further deposits or reduce other non-deductible debt. In retirement, when income is lower, the tax benefit of negative gearing is reduced or eliminated.

At 3% interest rates, negative gearing was almost a no-brainer for high-income investors. At 6.5% to 7%, the maths is more challenging — the annual losses are larger, requiring more capital growth to justify them.

Scenario: $700,000 residential investment property, 80% LVR, 7% interest rate

Loan amount: $560,000
Annual interest (IO): $39,200
Other deductible costs (rates, insurance, management, maintenance): $8,000
Depreciation deductions: $5,000
Total deductible expenses: $52,200
Annual rental income (4% gross yield): $28,000
Annual tax loss: $24,200
Tax saving at 47%: $11,374
Net out-of-pocket cost: $12,826 per year ($1,069 per month)

For this investment to be profitable over 10 years, the property needs to grow from $700,000 by more than $128,260 in total — just to cover the after-tax cash losses, before considering the opportunity cost of the deposit capital.

If the property grows at 6% annually, it would be worth approximately $1.25 million after 10 years — a gain of $550,000. The $128,260 in after-tax losses over the period would be easily covered. The investment works.

If it grows at 2% annually, the property would be worth approximately $853,000 — a gain of $153,000. After covering $128,260 in losses, the net gain is approximately $24,740 on a $140,000 deposit over 10 years. That is a poor return by almost any measure.

The maths of negative gearing is not inherently favourable or unfavourable. It depends entirely on the growth rate of the asset. At 2026 rates, the required growth rate to justify negative gearing is higher than it was at 2020 rates — because the annual losses are larger.

A positively geared property generates more income than it costs — the rental yield exceeds the cost of the loan and expenses. Positive cash flow from day one, no tax refund from losses.

The trade-off is typically growth: positively geared properties (often in regional markets or high-yield commercial assets) tend to have lower capital appreciation than the negatively geared properties in high-demand metropolitan markets.

For investors in retirement or approaching it, positive gearing becomes increasingly important — they need income, not deductions, and their marginal tax rate may be lower. For investors in accumulation phase with high incomes, negative gearing in a high-growth market is often the more powerful wealth-building strategy, despite the cash flow drag.

Most sophisticated investors build a portfolio that includes both — a negatively geared growth asset that builds equity, and a positively geared asset that offsets some of the cash flow cost. For the full portfolio strategy: property portfolio strategy Australia: how to structure your investments for retirement.

Not all property costs are immediately deductible. The ATO draws a clear distinction between deductible expenses (claimed in the year incurred) and capital expenses (depreciated over time or added to the cost base).

Immediately deductible:
• Loan interest (on investment loan only — not your home loan)
• Property management fees
• Council rates and water rates
• Landlord insurance
• Repairs and maintenance (must be genuine repairs, not improvements)
• Pest control, cleaning, gardening
• Advertising for tenants
• Accounting fees for preparing your rental property tax return
• Travel to inspect the property (limited — check current ATO rules)

Claimed via depreciation schedule:
• Division 43 capital works (2.5% of construction cost per year)
• Division 40 plant and equipment (carpets, blinds, appliances — subject to post-2017 rules)

Not immediately deductible (added to cost base):
• Purchase price and stamp duty
• Capital improvements (renovations that add value)
• Legal fees at purchase and sale

For the full breakdown of depreciation: investment property depreciation Australia: how to claim it and what it is worth.

The 2027 negative gearing changes announced in the 2026 federal budget are narrower than the headlines suggested. What is changing:

For new investors (properties purchased after the cutoff date): The ability to offset rental property losses against wage and salary income will be restricted for residential property. Losses will instead need to be carried forward and offset against future property income or capital gains — rather than being immediately applied against other income in the year they arise.

For existing holdings: Properties already held at the cutoff date are grandfathered under the current rules. Losses can continue to be immediately offset against other income as they have been.

The practical effect for high-income investors purchasing new residential investment properties after the cutoff: the immediate tax refund benefit of negative gearing is deferred rather than eliminated. You still get the deduction — it just may not reduce your tax bill in the year the loss occurs.

This is a meaningful change but not the abolition of negative gearing. For investors planning new purchases, it changes the cash flow timing of the tax benefit — which affects the carry cost of the investment and the selection of property (higher-yield properties become relatively more attractive under the new rules).

For the full analysis of the 2027 changes: negative gearing Australia: what is actually changing in 2027.

For investors already holding negatively geared properties: yes, it continues to make sense to hold and claim — the existing tax treatment is unchanged and the future capital gain expectation has not changed.

For investors considering a new purchase before the 2027 cutoff: the case is still strong for high-income investors in high-growth markets, with a property selected for growth fundamentals rather than just yield. The urgency to act before the cutoff is real — doing so preserves the grandfathered immediate-offset treatment indefinitely for that property.

For investors considering a new purchase after the 2027 cutoff: the immediate tax refund benefit is gone for new residential purchases, shifting the calculus toward higher-yield assets or SMSF structures where the tax environment is more favourable. The SMSF accumulation phase rate of 15% (10% effective on capital gains) is not affected by the residential negative gearing changes and remains an attractive alternative for investors who meet the balance threshold.

The strategy that still works clearly in 2026 and beyond: high-income earner, existing negatively geared growth property held and grandfathered, SMSF for any new property purchases where the balance supports it, and a clear retirement income target that drives the timing and sequencing of the portfolio. For that full strategy framework: the step-by-step Australian property investment strategy that actually works.

Book a Strategy Call

If you want to understand exactly how negative gearing applies to your situation and whether your current property strategy is still optimal, a 20-minute call is a good starting point.

Book a free 20-minute strategy call at: https://www.ausretirementoffice.com.au/book

Disclaimer: The information provided by Australian Retirement Office is general in nature and educational only. It does not constitute financial product advice, legal advice, or taxation advice, and does not take into account your objectives, financial situation, or needs. Australian Retirement Office does not hold an Australian Financial Services Licence (AFSL). Where appropriate, we may refer you to licensed professionals within our partner network. We may receive referral fees for these introductions. All investments carry risk, including potential loss of capital. Past performance is not a reliable indicator of future returns. You should obtain professional advice and review all relevant Product Disclosure Statements (PDS) before making any financial decisions.

Related reading: Negative Gearing: What Is Actually Changing in 2027 | Investment Property Depreciation: How to Claim It | CGT on Investment Property 2026 | Interest-Only Loans: Still Worth It in 2026? | Australian Property Investment Strategy