Negative Gearing in Australia: How it Works, What You Can Claim

Negative gearing is one of Australia’s most debated property tax strategies, and one that is widely used. More than two million Australians own investment properties, and a significant portion operate them at a net loss using the shortfall to reduce their taxable income each year.

 
What Is Negative Gearing?

Negative gearing is a term commonly used in Australia to describe a situation where the costs of owning an investment asset exceed the income it generates. In property investing, this usually happens when the rental income from an investment property is less than the expenses associated with owning it.

Those expenses can include interest on a loan, property management fees, maintenance costs, insurance, council rates and other deductible rental expenses. When expenses are higher than income, the property makes a net rental loss.
 

How Negative Gearing Works: A Worked Example

Some investors accept short-term rental losses because they believe the value of the property may increase over time. While rental income may not fully cover expenses in the early years, the expectation is that long-term capital growth could outweigh those losses.

If the property is eventually sold for more than its purchase price, capital gains tax may apply. Depending on how long the property is held and the taxpayer’s situation, a capital gains tax discount may be available. Market conditions and personal circumstances play a significant role in determining whether this outcome is realised.

The core calculation is straightforward:

Net Rental Loss = Total Annual Expenses − Annual Rental Income

Annual Tax Saving = Net Rental Loss × Marginal Tax Rate

Worked example: An investor in the 37% marginal tax bracket (income between $135,000 and $190,000 in 2025-26) purchases an investment property. Annual figures:
 

Item	Amount
Annual rental income	$26,000 ($500/week)
Loan interest (5.8% on a $600,000 loan)	$34,800
Council rates	$1,800
Insurance	$1,400
Property management (8%)	$2,080
Maintenance and repairs	$1,200
Depreciation (quantity surveyor schedule)	$4,500
Total annual expenses	$45,780
Net rental loss	$19,780
Tax saving at 37% marginal rate	$7,319
After-tax cash shortfall	$12,461 per year ($239/week)

 
The investor pays $239 per week out of pocket to hold the property. Their annual tax saving of $7,319 reduces that cost, but does not eliminate it. To justify the strategy, the property needs to grow in value by at least enough to cover the cumulative shortfall over the holding period, plus provide a return above what an alternative investment would have delivered.

Note: Depreciation is a non-cash deduction; it reduces taxable income without requiring an actual cash outlay in that year. A quantity surveyor’s depreciation schedule typically costs $600–$800 but can generate thousands of dollars in annual deductions, particularly on newer properties.
 

What Expenses Can You Claim on a Negatively Geared Property?

The ATO permits deductions for any expense incurred in producing rental income, provided the expense is not capital in nature. The following expenses are deductible in the year incurred:
 

Deductible Expense	Notes
Loan interest	Interest on funds borrowed to purchase or improve the property. Must be apportioned if the loan is used partly for private purposes.
Council rates and land tax	Fully deductible in the year paid.
Insurance premiums	Building, landlord, and contents insurance.
Property management fees	Agent commissions, letting fees, and lease renewal fees.
Repairs and maintenance	Must be for restoring something that was working, not improving or replacing it. Initial repairs to a newly purchased property are not immediately deductible.
Body corporate fees	For strata properties.
Cleaning, gardening, and pest control	Fully deductible.
Accounting and tax agent fees	For preparation of the rental property schedule and tax return.
Depreciation (Division 43: Building)	2.5% per year on construction costs for properties built after 15 September 1987. Requires a quantity surveyor report.
Depreciation (Division 40: Plant and Equipment)	Diminishing value or prime cost method on plant and equipment. Not available for second-hand items purchased after 9 May 2017 (for residential properties); new items still claimable.
Borrowing costs   - if over $100 deductible over the lesser of 5 years or the loan term

 
The following are NOT deductible immediately and must instead be added to the property’s cost base for CGT purposes:
 

• Capital improvements (extensions, renovations, new structural elements)
• Stamp duty and conveyancing costs on purchase
• Initial repairs to a property that was not in working condition when purchased

   

Negative Gearing and Capital Gains Tax: How They Interact

Negative gearing and capital gains tax are strategically linked in a way that most introductory articles fail to explain properly. Understanding the interaction is essential to evaluating whether the overall strategy is profitable.
 

The CGT Discount

When an investor sells a property held for more than 12 months, the capital gain that accrued prior to 1 July 2027 will generally reduced by 50% before being added to assessable income. 

IMPORTANT: From 1 July 2027, the current 50% CGT discount would be replaced for gains arising after that date. Gains arising after 1 July 2027 will be calculated using an inflation-adjusted cost base, subject to a minimum tax rate of 30%. While annual rental losses would continue to reduce income at the taxpayer's full marginal tax rate, the tax treatment of future capital gains could change significantly, reducing the tax-rate differential that currently exists between ongoing deductions and eventual capital gains.
 

How Depreciation Affects CGT

Depreciation deductions claimed under Division 43 (the building write-off) reduce the property’s cost base for CGT purposes. This increases the eventual capital gain on sale, which increases the CGT liability. Division 40 depreciation (plant and equipment) does not reduce the cost base but also does not affect the CGT calculation on the property itself.

The practical effect is that depreciation moves tax liability from the present to the future; it is a timing benefit, not a permanent saving. Whether that timing benefit is valuable depends on when you plan to sell, your marginal rate at the time of sale, and whether you will still qualify for the 50% CGT discount.
 

Is Negative Gearing Worth It? A Framework for Investors

There is no universal answer to whether negative gearing is worth it. The decision depends on four variables that interact differently for every investor: income, cash flow capacity, expected capital growth, and the cost of capital (interest rates).
 

What Income Level Benefits Most?

Negative gearing produces a larger annual tax saving the higher your marginal rate. At the 47% marginal rate, including medicare levy  (income above $190,000), every $1,000 of net rental loss generates $470 in tax savings. At the 32% rate ($45,001–$135,000), the same loss generates $320 in savings.
 

Marginal Tax Rate +Medicare	Taxable Income (2025–26)	Tax Saving per $10,000 Loss
18%	$18,201 – $45,000	$1,800
32%	$45,001 – $135,000	$3,200
39%	$135,001 – $190,000	$3,900
47%	Above $190,000	$4,700

Investors on incomes below $45,000 receive limited tax benefit from negative gearing, and the strategy rarely makes sense at this income level on tax grounds alone.
 

What Cash Flow Buffer Do You Need?

The ATO’s PAYG withholding variation (NAT 2036) allows investors to reduce their pay period tax withholding to reflect the expected rental loss, which improves weekly cash flow. Without this, investors must fund the shortfall from take-home pay and wait for the annual refund.
 
As a conservative planning rule, investors should hold a cash buffer of at least six months of gross shortfall (before tax benefit) in an accessible account. On a property with a $15,000 annual pre-tax shortfall, that means $7,500 in reserve at a minimum. In practice, most financial advisers recommend three to six months of the total mortgage repayment as a minimum buffer.
 

How Do Rising Interest Rates Affect the Maths?

Higher interest rates increase the rental loss, which increases the tax savings but also increases the out-of-pocket cash shortfall. An investor with a $600,000 loan who refinances from 3.5% to 5.8% sees their annual interest cost rise by $13,800. Their tax savings increase by approximately $5,106 (at 37%), but they are still $8,694 worse off in cash terms per year.
 
At high enough interest rates, the cash flow burden becomes unsustainable regardless of the tax benefit. The tax saving amplifies returns in a positive-growth environment, but does not eliminate the real cash cost. Investors who leveraged heavily at low rates and have not stress-tested their serviceability at current rates are most exposed.
 

The 2027 Negative Gearing Reforms: What Investors Need to Know

The following changes apply from 1 July 2027:
 

• For residentail properties purchased after 12 May 2026, negative gearing deductions will only be available for newly constructed properties.
• Investors who currently hold negatively geared established properties will be grandfathered under the existing rules indefinitely, provided they retain ownership of those properties. Property transfers forced by a ""marriage breakdown"" (divorce settlement) or the death of a spouse will not trigger the loss  of grandfathering. The grandfathering cutoff is Budget night (12 May 2026), not 1 July 2027
• The 50% CGT discount is being replaced. From 1 July 2027, an inflation-adjusted cost base (indexation) method will apply to gains accruing after that date, with a minimum 30% tax rate on capital gains. Investors in new builds may choose between the 50% discount and the new inflation method.
• Investors who buy established housing after Budget night will still be able to deduct losses against residential property income only, including capital gains, but not against other income such as salary.

 

The practical implications for different investor types:
 

Investor Situation	Impact of the 2027 Reform
Currently holds a negatively geared established property (purchased before 12 May 2026)	No change. Fully grandfathered. CGT changes apply to gains accruing after 1 July 2027.
Considering purchasing an established property before 1 July 2027	Grandfathering only applies to purchases made before Budget night (12 May 2026). Purchases of established property after that date will not be grandfathered for negative gearing deductions against other income.
Considering purchasing an established property after Budget night	Negative gearing deductions would not be available. Cash flow analysis changes materially.
Considering purchasing a new build after Budget night	Negative gearing remains fully available. The investor may choose between the 50% CGT discount or the new inflation-based method on sale.
Holds property through a company or trust	Company and trust ownership structures are treated separately. Seek specific advice on whether the proposed restrictions apply.

   

Negative Gearing Ownership Structures: Personal, Joint, Trust, and SMSF

How you hold an investment property affects who can claim the negative gearing deduction, at what tax rate, and what happens when you sell. The four common structures are:
 

Structure	Negative Gearing Available?	Tax Rate on Loss	Key Consideration
Personal (individual)	Yes	Up to 45%	Simplest. CGT discount available on sale.
Joint ownership	Yes, by ownership %	Each owner's rate	Deductions and rental income generally need to be reported according to each owner's legal ownership interest in the property. This means that expenses and income are typically divided based on the ownership percentages recorded on the property's legal title, rather than according to the owners' respective tax positions or preferences.
Discretionary trust	No, losses quarantined	N/A	Not suitable for negative gearing strategies.
SMSF	Yes, at super rate	15%	Low rate makes deduction less valuable. Strict borrowing rules apply.
Company	Yes, at company rate	25% or 30%	No CGT discount on sale. Rarely used for residential investment.

   

Negative Gearing vs Positive Gearing: Which Strategy Suits You?

Property investors in Australia generally fall into one of two categories: negatively geared or positively geared. The difference comes down to whether the rental income from the property covers the ongoing costs of holding it.

A property is negatively geared when the deductible expenses exceed the rental income, creating a net loss for tax purposes. A property is positively geared when the rental income exceeds the deductible expenses, producing a net profit.

Neither approach is automatically “better.” The right strategy depends on your cash flow, income level, investment goals, borrowing costs, and tolerance for risk.
 

Negative Gearing	Positive Gearing
Property operates at a net loss	Property generates surplus income
Deductible losses may reduce taxable income	Net rental profit increases taxable income
Often associated with growth-focused investing	Often associated with income-focused investing
Usually requires ongoing cash contributions from the investor	May improve cash flow immediately
Tax benefits can partially offset losses	Less reliance on tax deductions
More common in high-growth metropolitan markets	More common in high-yield regional or lower-priced markets
Higher sensitivity to interest rate rises	Generally lower holding-cost pressure

 
How Negative and Positive Gearing Affect Tax

With negative gearing, the net rental loss maybe able to be offset against other assessable income, including salary and wages. This reduces taxable income and lowers the amount of tax payable for the year.

With positive gearing, the net rental profit is added to your taxable income and taxed at your marginal rate. While this increases tax payable, the property also produces positive cash flow that may improve borrowing capacity and reduce financial pressure.
 

Which Strategy Is Better?

There is no universally superior approach. Some investors prioritise long-term capital growth and accept short-term cash flow losses, while others prefer stable rental income and lower holding costs.

Negative gearing is a tax outcome rather than a guaranteed investment strategy. The underlying investment still needs to make financial sense based on factors such as rental demand, interest rates, vacancy risk, maintenance costs, and long-term growth potential.

Your ideal strategy depends on:
 

• your income and marginal tax rate,
• cash flow capacity,
• investment timeframe,
• risk tolerance,
• and broader financial goals.

 
H&R Block Tax Experts can help you understand the after-tax position of an investment property, but investment decisions should always be assessed in the context of your overall financial situation.
 

Common Mistakes and ATO Audit Triggers for Rental Properties

The ATO applies data-matching across rental income, property transactions, bank records, and third-party platforms including short-term accommodation services. The following are the most common mistakes and the most common triggers for ATO scrutiny:
 

Common Deduction Errors

• Claiming the full interest cost when part of the loan was redrawn for personal purposes
• Claiming initial repairs on a newly purchased property as immediate deductions (these are capital costs)
• Claiming depreciation on second-hand plant and equipment for residential properties (not permitted after 9 May 2017)
• Claiming travel to inspect or maintain a residential rental property (not permitted since 1 July 2017)
• Claiming deductions for periods when the property was not genuinely available for rent (e.g., while owner-occupied or held for personal use)
• Apportioning holiday home expenses without evidence of genuine availability for rent

Record Keeping

The ATO requires rental property records to be kept for five years from the date of lodgement of the return in which they are claimed. For capital improvements, records must be kept for the entire ownership period plus five years after disposal (because they affect the CGT calculation on sale).

Records to retain include purchase and sale contracts, loan documents, all expense receipts, property management statements, depreciation schedules, and records of any periods the property was used personally.

Most Common ATO Audit Triggers

• Deductions that are significantly higher than comparable properties in the same suburb and price range
• Zero or very low rental income combined with high deductions (suggesting the property is not genuinely available for rent)
• Inconsistencies between the rental income reported and the income reported to the property manager
• Depreciation claims without a quantity surveyor schedule for properties where one is required
• Short-term rental income that is not reported (Airbnb, Stayz), these platforms report income directly to the ATO