Negative gearing is when the expenses incurred in holding an investment property are higher than the rental income it earns. This creates a net rental loss. Under Australia’s current tax rules, that loss can generally be offset against other income, such as salary or wages, which may reduce taxable income and the income tax an investor has to pay.
That is the simple answer to “what is negative gearing”. A negatively geared property creates a real cash-flow shortfall, usually accepted in the hope that rent increases, depreciation deductions and a future capital gain make the investment worthwhile.
The 2026/27 Federal Budget changes matter. These changes are now law under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. From the 2027-28 income year, a rental loss on an established residential property bought at or after 7:30pm AEST on 12 May 2026 can generally only be deducted against residential rental income or residential capital gains, with any excess carried forward. Eligible new builds keep the current treatment, and earlier purchases are grandfathered until sold.
General information only: This article is general in nature and ignores your personal circumstances. Australia’s taxation system and tax laws can change, so treat this as general nature guidance, not tax advice, financial advice or legal advice. Speak with a registered tax agent or financial advisor before investment decisions; compare other sources and other investments.
Negative gearing rules now and from 2027-28
| Area | Current general rule | Change from 2027-28 (now law) |
|---|---|---|
| Negative gearing | Rental losses may generally offset other income | Limited to eligible new builds for residential property bought from 7:30pm AEST on 12 May 2026 |
| Established property | Losses may generally offset salary or wages | New established purchases may face quarantined losses |
| New builds | Treated under existing negative gearing rules | Eligible new builds keep the broader treatment (which homes count is still a Treasury draft) |
| Excess losses | May reduce taxable income where eligible | May be carried forward if restricted |
| CGT | 50% CGT discount may apply after 12 months | From 1 July 2027: indexation and a 30% minimum tax on net capital gains |
What is negative gearing?
Negative gearing occurs when costs of an income-producing asset exceed the income earned from that asset. In property investment, the asset is usually a rental property and the income is rent from tenants.
A property is negatively geared when deductible rental expenses exceed rent. Expenses can include mortgage interest, interest repayments, council rates, insurance, repairs, property management fees, strata levies, eligible depreciation and other costs incurred for tax purposes.
Example: an investor receives $32,000 in rental income but has $43,000 in deductible expenses. The property has an $11,000 net loss. Under current tax treatment, many taxpayers can claim that net rental loss in their tax return and offset it against other taxable income.
The Australian Taxation Office expects records and only allows deductions under tax rules. Some costs are deductible now, some over time, and some form part of cost base for capital gains tax.
Negative gearing is often described as a way to reduce a tax bill, but it is a cash-flow strategy first. A deduction does not refund the loss. If a negatively geared investor has a $10,000 rental loss, the tax benefit depends on their marginal income tax rate, Medicare levy position, other taxes and personal circumstances.
Investors still need enough money to fund the shortfall. Negative gearing works best with stable income, a cash buffer, realistic growth expectations and changing market conditions in mind. It becomes risky if interest rates rise, rent falls, tenants leave, repairs increase or property value drops.
Negative gearing vs positive gearing quick explainer
| Gearing type | What it means | Cash flow outcome | Tax outcome | Best suited to |
|---|---|---|---|---|
| Negative gearing | Expenses are higher than rental income | Loss before tax | May reduce taxable income under current rules | Investors focused on long-term growth |
| Neutral gearing | Rental income roughly equals expenses | Break-even | Limited tax impact | Investors seeking balance |
| Positive gearing | Rental income is higher than expenses | Profit before tax | Net rental income is usually taxable | Investors seeking regular income |
How negative gearing works
Here is a simple example of how negative gearing works.
An investor buys an investment property and receives $600 per week in rent, or $31,200 per year. They pay $35,000 in interest expenses, $2,000 in council rates, $1,500 in insurance, $2,300 in property management fees, $1,500 in repairs and $1,000 in other rental expenses.
- Rental income: $31,200
- Less expenses: $43,300
- Net rental loss: $12,100
Under current rules, the investor may be able to offset that rental loss against salary, wages or other income. That may reduce taxable income, but the investor still has to pay the loan, interest, rates and other costs during the year.
Simple negative gearing example
| Item | Annual amount |
|---|---|
| Rental income | $31,200 |
| Loan interest | $35,000 |
| Council rates | $2,000 |
| Insurance | $1,500 |
| Property management fees | $2,300 |
| Repairs | $1,500 |
| Other rental expenses | $1,000 |
| Total deductible expenses | $43,300 |
| Net rental loss | $12,100 |
Negative gearing works after the 2026/27 Federal Budget
From the 2027-28 income year, the law limits negative gearing for residential property bought at or after 7:30pm AEST on 12 May 2026 to eligible new builds (Treasury Laws Amendment (Tax Reform No. 1) Act 2026). For an established residential property bought from that time, a rental loss can’t reduce salary or other non-property income. The excess first reduces residential rental income and residential capital gains in the same year, and only the rest is carried forward to later years.
Eligible new builds remain outside this restriction, so investors in qualifying new residential property may continue to access the broader negative gearing treatment. The aim is to direct investment toward new housing supply, not existing dwellings.
Why Investors Buy an Investment Property
An investment property is usually purchased to earn rent, achieve a future capital gain, or both. Because many investors borrow money to buy property, loan structure and interest costs influence whether the property is negatively geared, neutral or positively geared.
Investors should compare after-tax cash flow, expected growth, depreciation potential, vacancy risk, loan to value ratio and financial goals before they invest.
When You Claim Rental Property Expenses
A rental property generally needs to be rented or genuinely available before deductions can be claimed. Keep lease records, property manager statements, invoices and loan statements.
Rental income can include rent, tenant reimbursements and some insurance payments. Rental expenses can include advertising, repairs, council rates, insurance, agent fees, interest and eligible depreciation. Some costs may be capital and relevant to CGT instead.
Which Rental Expenses You Can Claim
Rental expenses drive positive or negative gearing. Common deductions include mortgage interest, property management fees, council rates, landlord insurance, repairs, cleaning, gardening, body corporate fees and professional costs related to the rental property.
Other expenses may be claimed over time, such as borrowing costs, capital works deductions and decline in value of eligible assets. Loan repayments include principal and an interest component; mortgage interest may be deductible, but principal is not. A full repayment of loan principal is not an income tax deduction.
What happens to a rental loss?
Rental losses occur when deductions exceed rent. Under current rules, many investors can offset against other income, reducing tax payable.
Under the 2026/27 reforms, now law, losses from established residential property bought at or after 7:30pm AEST on 12 May 2026 are quarantined from the 2027-28 income year. Instead of reducing salary income, the loss first reduces residential rental income and residential capital gains in the same year, and the rest is carried forward.
| Scenario | Rental income | Deductible expenses | Net result | What it means |
|---|---|---|---|---|
| Positively geared | $35,000 | $28,000 | $7,000 profit | Investor may pay tax on net rental income |
| Neutrally geared | $35,000 | $35,000 | $0 | Income and expenses are broadly balanced |
| Negatively geared | $35,000 | $47,000 | $12,000 loss | Investor has a cash-flow shortfall before tax |
Risks of negative gearing and who it suits
A property is negatively geared when it produces a net rental loss. This happens when market conditions change. Higher interest rates, repairs, vacancy periods and limited rent increases can turn a property from profitable to loss-making.
Being negatively geared requires discipline. Investors need to understand the cash-flow gap before tax time, not just the potential deduction after lodging a tax return.
A negatively geared property may suit investors with reliable income and a long-term growth focus. It may not suit investors who need immediate net profit or would struggle to cover ongoing losses.
The main risk is relying too heavily on tax benefits and future growth. If values fall or stagnate, the investor may carry annual losses without the expected capital gain.
Risks to weigh up:
- Reliance on capital growth: the strategy only works if property values rise.
- Cash flow pressure: you must cover the shortfall between income and expenses.
- Interest rate risk: rising interest rates can increase losses.
- Market volatility: falling values can limit equity and delay investment plans.
- Over-leveraging: borrowing too much without a financial buffer can cause stress if conditions change.
- The 2027-28 loss rules: for a residential property bought at or after 7:30 pm AEST on 12 May 2026 that isn’t an eligible new build, from 2027-28 the loss can’t reduce your salary. It first reduces residential rental income and residential capital gains, and the rest carries forward.
Best suited for:
- High-income earners in higher tax brackets, although the tax benefit now depends on whether the property is affected by the 2027-28 loss rules.
May not suit:
- First-time buyers with limited cash flow, who may struggle with losing money in the short term.
- Risk-averse investors who are uncomfortable with uncertainty and the possibility of losing money.
What is Positive Gearing and Who Does It Suit
Positive gearing is the opposite. A property is positively geared when rental income is higher than deductible expenses. The investor earns a net profit, which generally increases taxable income and may mean they pay tax on that profit.
Example: if a rental property earns $35,000 in rent and has $28,000 in deductions, it has $7,000 in net rental income. Cash flow improves, even though the investor may pay more tax
A positively geared property can suit investors who want income and lower holding stress. A positively geared investment may also help borrowing capacity, but investors still need to assess location, tenant demand, maintenance costs, growth prospects and asset quality.
Should You Choose Positive or Negative Gearing
The choice between positive or negative gearing depends on income, risk tolerance, financial goals, loan size and time horizon. Negative gearing may suit long-term growth investors who can absorb losses. Positive gearing may suit investors who prefer income and cash-flow stability.
After the Budget announcement, investors also need to ask whether the property is an eligible new build or established dwelling, and when it was acquired.
How Capital Gains Tax Applies When You Sell
Capital gains tax applies when an asset is sold for more than its cost base. For property investors, CGT matters because many negative gearing strategies rely on future growth.
Under current rules, individuals may qualify for a 50 per cent CGT discount where an asset has been held for more than 12 months. Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, from 1 July 2027 the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax on net capital gains. Transitional rules mean the changes apply only to gains arising on or after 1 July 2027. Investors in eligible new residential property can choose either the 50 per cent CGT discount or the new indexation and minimum tax method.
How a Capital Gain and Cost Base Worked Out
A capital gain is broadly the difference between sale proceeds and the property’s cost base. The cost base can include purchase price and certain acquisition, holding and selling costs not already claimed as deductions.
Good records matter. If an investor claims an expense as an income tax deduction, they generally cannot also use it to increase the cost base. A tax depreciation schedule and valuation records can help advisers separate annual deductions from CGT records.
Impact on the Australian property investment market
Negative gearing affects the property market because it changes the after-tax cost of holding an investment property. When losses can be offset against salary or other income, investors may accept lower rental yield if they expect long-term growth.
Supporters argue negative gearing helps rental supply. Critics argue it can increase investor demand for established homes and make it harder for first-home buyers to compete. The Budget reform aims to shift incentives toward new housing supply by favouring eligible new builds over established residential property.
Market impact depends on interest rates, rents, construction costs and credit.
Tax deductions and compliance
Investors should not buy property just to claim deductions or chase tax savings. Deductions can improve the result, but they do not turn a weak investment into a strong one.
For each financial year, keep records of rent, expenses, loan interest, repairs, council rates, insurance, agent statements, depreciation schedules, purchase costs and improvements. Seek tax advice for refinancing, private use, related-party rent, renovations or carried-forward losses.
To make negative gearing effective, investors should:
- Assess cash flow and ensure they can cover shortfalls, including interest repayments and other expenses.
- Invest in growth areas with demand and infrastructure, taking into account potential capital growth.
- Keep a depreciation schedule and records of interest and other expenses.
- Reinvest tax savings and any additional income to accelerate debt reduction and potentially have more money for future investments.
- Review their strategy regularly and check whether each property is affected by the 2027-28 loss rules (when it was bought, and whether it is an eligible new build), considering how their investment fits within their broader financial or business plans.
Recent 2026/27 Federal Budget changes investors should know
The negative gearing and CGT changes announced in the 2026/27 Budget are now law (Treasury Laws Amendment (Tax Reform No. 1) Act 2026):
- From the 2027-28 income year, a residential property bought at or after 7:30 pm AEST on 12 May 2026 that isn’t an eligible new build can no longer be negatively geared against salary. Its rental loss first reduces residential rental income and residential capital gains, and the rest is carried forward.
- Properties bought before that time keep the current negative gearing rules. Our guide to negative gearing grandfathering explains who is covered.
- From 1 July 2027, the 50 per cent CGT discount is replaced by cost base indexation and a 30 per cent minimum tax for gains made from that date. Eligible new builds can still choose the 50 per cent discount; which homes count as new builds is still a Treasury draft.
For the full detail, read Is negative gearing abolished?
Negative Gearing Quick Glossary Table
| Term | Simple meaning |
|---|---|
| Negative gearing | Rental expenses are higher than rental income |
| Positive gearing | Rental income is higher than rental expenses |
| Rental loss | The shortfall created when deductions exceed rent |
| Deductible expense | A cost that may reduce taxable income |
| Depreciation | A tax deduction for eligible building works or assets over time |
| Capital gain | Profit made when an asset is sold for more than its cost base |
| Cost base | The amount used to calculate a capital gain or loss |
| Grandfathering | Existing arrangements continue under old rules for eligible cases |
Final thoughts about negative gearing
Negative gearing can reduce taxable income when a rental property makes a deductible loss, but it also creates a real cash-flow cost. The 2026/27 Federal Budget means investors must think more carefully about acquisition timing, new builds, established property, carried-forward losses, CGT and long-term strategy.
Duo Tax can help with tax depreciation schedules and property valuation services for better records and adviser conversations.
Check out our negative gearing calculator to model your own personal financial situation.
FAQs
Is negative gearing good or bad?
It depends. Negative gearing can help some property investing strategies manage tax outcomes, but it still means the property is losing money before tax.
Do I get all my rental losses back?
No. A deduction may reduce taxable income, but it does not refund the full loss.
What changed in the 2026/27 Budget?
From the 2027-28 income year, negative gearing for residential property bought at or after 7:30pm AEST on 12 May 2026 is limited to eligible new builds. The Budget announced this change and it is now law under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.
Should I choose positive or negative gearing?
That depends on cash flow, risk tolerance, market view and personal circumstances. Get advice before deciding, especially where interest payments may exceed rent.
Can negative gearing reduce my tax?
Yes, negative gearing may reduce your taxable income if your rental property expenses are higher than your rental income. However, it does not remove the loss. It only reduces the amount of income tax you may pay, depending on your marginal tax rate and personal tax position.
Why would investors buy a negatively geared property?
Some investors accept short-term cash flow losses because they expect long-term capital growth, future rent increases, depreciation deductions or other tax benefits to improve the overall return. This strategy carries risk because growth and rental increases are not guaranteed.
What expenses can contribute to negative gearing?
Common expenses may include loan interest, property management fees, council rates, repairs, insurance, strata fees, accounting costs and some depreciation deductions. The rules can vary depending on the property, ownership structure and how the property is used.
Does depreciation affect negative gearing?
Yes. Depreciation can increase the deductible expenses linked to an investment property, which may improve tax outcomes without requiring an immediate cash payment. A tax depreciation schedule can help identify eligible capital works and plant and equipment deductions.
Will negative gearing changes affect existing investment properties?
The new rules, now law, include timing and eligibility conditions, so the impact depends on when the property was acquired and whether it is an eligible new build or an established dwelling. Properties bought before 7:30pm AEST on 12 May 2026 keep the current negative gearing rules. Investors should review their position before buying or selling.
