Negative gearing in Australia: how it works (2026)

A tax deduction can soften a loss, but it can’t turn a poor purchase into a good one. Buy a property that still works if the tax benefits shrink further, whatever the marketing says about it.

What negative gearing is

Negative gearing occurs when the costs of owning a rental property exceed the rental income it generates, in other words, the property runs at a net loss. In Australia, this net rental loss can be deducted from your other taxable income (such as wages or business income), reducing your overall tax bill.

The tax deduction is the mechanism that makes negative gearing attractive: the government effectively subsidises part of your investment loss through reduced income tax. The strategy works best when you are in a high marginal tax bracket and the property is expected to appreciate over time, delivering a capital gain that more than offsets the cumulative rental losses.

Key principle. Negative gearing is not a free lunch. You are genuinely losing money on a cash-flow basis; you are betting that capital growth will deliver a larger long-term gain.

Worked example

A realistic example using a $700,000 investment property with an 80% LVR loan:

This $11,163 net rental loss is deducted from your other taxable income. The after-tax benefit depends on your marginal tax rate. At the ATO’s 2026–27 resident rates (last updated 13 August 2026), before the 2% Medicare levy:

At a 37% marginal rate, the investor’s actual out-of-pocket cost of holding this property is roughly $7,033 a year (about $135 a week), compared to the apparent $11,163 rental loss. The higher your tax rate, the more the government subsidises your holding costs.

Run your own figures through our negative gearing calculator, which uses the 2026–27 tax rates and shows what changes for your property from 1 July 2027.

If this property grows at 5% a year, it would be worth approximately $1,140,000 after 10 years, a gain of about $440,000, well exceeding the cumulative holding costs of approximately $70,330 over the decade.

What expenses are deductible?

The ATO allows deductions for most legitimate costs of earning rental income. Deductible expenses include:

• Loan interest. The interest portion of your mortgage repayment. Principal repayments are not deductible.
• Council rates and water rates.
• Building and landlord insurance.
• Property management fees. The agent’s management fee and any leasing/letting fees.
• Repairs and maintenance. Costs to restore the property to its original condition (not improvements, see below).
• Pest control, cleaning, and gardening.
• Advertising costs to find tenants.
• Depreciation. On the building (Division 43) and eligible plant and equipment (Division 40), see below.
• Accountant fees for preparing your rental schedule.
• Travel to inspect the property. Note: deductions for travel to residential rental properties were removed from 1 July 2017.
• Legal fees for issues arising from tenancy (not purchase).
• Borrowing costs (loan establishment fees, mortgage stamp duty, lenders mortgage insurance), amortised over the loan term (typically 5 years).

What is NOT deductible?

• Capital improvements. Adding a new deck, extending a room, or installing a new kitchen are capital improvements, not repairs. They are added to the property’s cost base for CGT purposes, not deducted immediately.
• Purchase costs. Stamp duty, conveyancing fees, and purchase-related legal fees are capital costs that form part of the cost base, not immediately deductible.
• Principal loan repayments.
• Personal use portion. If you use the property yourself for any period, you must apportion expenses, only the rental income period is deductible.
• Rental losses when not genuinely available for rent. You must be actively trying to rent the property at market rent for deductions to apply.

Depreciation: the tax benefit most investors miss

Depreciation is a non-cash deduction, you don’t spend money on it, but you still get a tax deduction. It represents the decline in value of the building and its fixtures over time.

Division 43: building allowance

The ATO allows you to claim 2.5% of the original construction cost of the building each year, for 40 years from when construction was completed. Only applies to properties built after 18 July 1985 (the construction date, not the purchase date).

Division 40: plant and equipment

Separate from the building itself, you can claim depreciation on individual plant and equipment assets in the property. Each item has a useful life, and you claim depreciation on it over that period.

From 1 July 2017, second-hand plant and equipment in a previously used residential property is generally not deductible for individual investors. New properties and commercial properties are unaffected.

Quantity surveyor report

To claim Division 43 and Division 40 depreciation, you need a depreciation schedule prepared by a registered quantity surveyor. Cost: typically $500 to $800 for a standard residential property. See our Property Depreciation Guide for the full mechanics.

The CGT connection

Negative gearing is most effective when the strategy eventually results in a capital gain. When you sell the investment property, you will pay Capital Gains Tax (CGT) on the profit. On a sale before 1 July 2027, if you have held the property for at least 12 months, an individual or trust gets a 50% CGT discount on the gain, meaning only half of the capital gain is included in your assessable income.

Example. You bought for $700,000 in 2017 and sell for $1,000,000 before 1 July 2027. Capital gain: $300,000 (less any capital improvements and selling costs). With the 50% CGT discount, only $150,000 is added to your taxable income in the year of sale.

From 1 July 2027. The law passed on 25 June 2026 replaces the 50% discount for individuals, trusts and partnerships with cost base indexation, so only the gain above inflation is taxed, and a 30% minimum tax on the gain for resident individuals. It covers property you already own: the gain up to 1 July 2027 keeps the 50% discount, and the gain after it is indexed from the property’s value on that date. Nothing is payable until you sell. An investor who buys a new build can choose the 50% discount or indexation when they sell. The 12 May 2026 cut-off is a negative gearing rule only; it does not keep the CGT discount. Our CGT changes explainer has the worked examples.

Tax deductions at your full marginal rate on rental losses, plus a discounted tax rate on the eventual gain, is why negative gearing has been so widely used in Australia. Use our CGT Calculator to model the exit under the rules that apply before 1 July 2027.

Note: depreciation deductions may be subject to recapture at sale for the Division 40 (plant and equipment) component. Your accountant can advise on the CGT implications of prior depreciation claims.

Positive vs neutral vs negative gearing

High-yield markets (regional towns, mining areas) are more likely to produce positive or neutral gearing. Low-yield, high-growth markets (inner Sydney, Melbourne) typically produce negative gearing at current prices.

Use our Rental Yield Calculator to estimate the gross yield for any property and assess whether it is likely to be positively or negatively geared.

Risks of negative gearing

• Vacancy. A vacant property earns no rent but still incurs all holding costs. Even a single month’s vacancy significantly worsens your cash flow. Landlord insurance with rent default cover can partially mitigate this.
• Interest rate rises. Since 2022, RBA rate increases have significantly increased interest costs for investors on variable rate loans. A 2% rate rise on a $560,000 loan adds $11,200 a year to costs, potentially turning a manageable loss into a severe one.
• Legislative change. The rules have just changed: the 2026–27 Budget package, passed on 25 June 2026, limits negative gearing to new builds and replaces the 50% CGT discount from 1 July 2027 (see below). Parliament can change them again, so a property should still work if the tax benefits shrink further.
• No capital growth. If the property does not appreciate, the strategy fails: you are left with accumulated losses and no compensating gain.
• Serviceability strain. If your income drops (job loss, illness), your ability to cover the ongoing loss is compromised. Many investors have been forced to sell at sub-optimal times due to financial pressure.

Is negative gearing still available in 2026?

Yes, for every investor until 30 June 2027. After that it depends on when you bought and what. The 2026–27 Budget package is law: the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 passed both Houses on 25 June 2026 and received Royal Assent on 26 June 2026. From 1 July 2027 it limits negative gearing for residential property to new builds (ATO, last updated 29 June 2026).

• Held at 7:30pm AEST on 12 May 2026, including under a contract signed but not yet settled: keeps negative gearing for as long as you own it.
• An established home contracted after that time: can be negatively geared until 30 June 2027. From 1 July 2027 its losses only offset income from residential property, including capital gains on residential property, and the excess carries forward to later years.
• A new build: keeps negative gearing whenever you buy it, but only the first buyer gets it. The Act leaves the exact definition to a ministerial instrument; the Budget explainer’s examples include an off-the-plan apartment, a home built on vacant land and a knock-down that replaces one house with more than one dwelling, but not an extension or a one-for-one rebuild.
• Who it covers: individuals, partnerships, companies and most trusts. Super funds, including SMSFs, and widely held trusts are excluded.
• Commercial property and shares: negative gearing is unchanged.

The 50% CGT discount changes on the same date; see the CGT connection above. Parliament can change these settings again, so any investment should remain viable if the tax benefits were reduced further. Do not invest solely on the basis of tax deductions.

Tax return obligations

If you own a rental property, you must:

• Lodge an Australian income tax return each year you earn rental income, including a rental property schedule.
• Report all rental income received (including bond money retained, insurance payouts for lost rent).
• Claim all eligible deductions. You are not required to claim them, but it would be financially irrational not to.
• Maintain records for all income and expenses for at least 5 years (and for the entire period of ownership for CGT purposes).
• Apportion expenses if the property was rented for only part of the year or used for personal purposes.
• Report the sale in the tax return for the year settlement occurred, including the CGT calculation.

Most property investors use a tax agent or accountant who specialises in investment properties. The cost of professional tax advice is itself a deductible expense.