What Is Negative Gearing in Australia?

You hear the term "negative gearing" in every conversation about property investment in Australia. It is one of the most discussed, most misunderstood, and most politically charged concepts in the country's tax system.

This guide explains what negative gearing actually is, how the tax mechanics work, what expenses you can claim, and what the 2026 Federal Budget changes mean for investors buying property from mid-2027 onwards.

How Negative Gearing Works

Negative gearing is straightforward. It happens when the total costs of owning your rental property exceed the rental income the property produces. The difference is a net rental loss.

Under current rules, that loss is deductible against your other income, including your salary, business income, or investment returns. The loss reduces your total taxable income, which reduces the amount of tax you pay.

The opposite is positive gearing, where your rental income exceeds your expenses and you have a net profit. That profit is added to your taxable income. You can read more about how rental returns work in our rental yield guide.

Most investment properties in Australia are negatively geared, particularly in the early years of ownership when mortgage interest payments are highest and the property has not yet seen significant rental growth.

What Counts as Rental Income

Before you can work out whether your property is negatively or positively geared, you need to know what the ATO considers rental income.

According to the ATO's Rental Properties Guide 2025, rental and rental-related income is the full amount of rent and associated payments that you receive, or become entitled to, when you rent out your property. Whether it is paid to you or your agent, you must include your full share of the amount of rent you earn in your tax return.

This includes more than just weekly rent. The ATO states you must also include:

• Bond money you are entitled to retain (for instance, because a tenant defaulted on rent or caused damage requiring repairs)
• Insurance payouts that compensate you for lost rent
• Letting or booking fees
• Reimbursements from tenants for deductible costs like repairs
• Government rebates for the purchase of depreciating assets, such as solar hot-water systems

If you co-own a property, the income and expenses must be divided according to your legal interest. Joint tenants split everything equally. Tenants in common split according to their ownership percentages. According to the ATO, any agreement between co-owners to divide income and expenses in different proportions has no effect for income tax purposes.

What Expenses Create a Negative Gearing Position

The expenses side of the equation is where negative gearing takes shape. According to the ATO's Rental Properties Guide 2025, you can claim a deduction for certain expenses you incur for the period you rent your property or it is genuinely available for rent.

There are three categories of rental expenses:

1. Expenses you can claim immediately in the income year you incur them
2. Expenses you claim over several income years (depreciation and capital works)
3. Expenses you cannot claim at all

Expenses You Can Claim Immediately

These are the ongoing costs of holding and managing the property. They include:

• Interest on your investment loan
• Council rates
• Water charges
• Building and landlord insurance
• Body corporate fees
• Property management fees and agent commissions
• Advertising for tenants
• Cleaning, gardening, and lawn mowing
• Pest control
• Repairs and maintenance
• Legal expenses related to renting the property
• Land tax
• Stationery, telephone, and postage costs related to the property

Interest on your loan is almost always the largest single deduction, and it is usually the expense that tips a property into negative gearing territory. For a deeper breakdown of what you can and cannot claim, see our guide to investment property tax deductions.

Expenses You Claim Over Several Years

Two major deductions fall into this category:

• Decline in value of depreciating assets. This covers items like carpets, blinds, hot-water systems, and appliances. You claim the cost progressively over the asset's effective life. Note that according to the ATO, you cannot claim a deduction for a decline in value of certain second-hand depreciating assets in your residential rental property unless an exception applies.
• Capital works deductions. These cover the cost of constructing or renovating the building itself. Typically claimed at 2.5% per year over 40 years for properties built after 15 September 1987.

Expenses You Cannot Claim

The ATO is clear on what does not qualify. You cannot claim deductions for:

• Expenses you do not actually incur, such as water or electricity paid by your tenants
• Expenses when your property was not genuinely available for rent
• Costs of maintaining a non-income producing property used as collateral for the investment loan
• Expenses related to holding vacant land
• Acquisition and disposal costs of the property (purchase price, stamp duty, conveyancing fees, buyer's agent fees) — however, these costs may form part of the property's cost base for capital gains tax purposes
• Travel expenses relating to your residential rental property (with limited exceptions)

The ATO also notes that if you pay a contractor who does not provide an ABN, you may need to withhold 47% of that payment and pay it to the ATO. If you fail to do so, you may lose the deduction entirely.

A Worked Example: How Negative Gearing Reduces Your Tax

The ATO's Rental Properties Guide 2025 includes a worked example that illustrates how negative gearing creates a loss position.

In this case, the investor's property expenses are more than double the rental income. The $11,329 net rental loss is the amount that reduces the investor's other taxable income.

If the investor earns $100,000 in salary, their taxable income drops to $88,671. The tax saving depends on their marginal tax rate. At a marginal rate of 37 cents per dollar (the rate for income between $45,001 and $135,000), the rental loss saves approximately $4,192 in tax.

The investor still has an out-of-pocket loss for the year. But the tax deduction softens it. The bet is that capital growth over the holding period will more than compensate for the annual cash flow shortfall.

When Negative Gearing Works and When It Does Not

Negative gearing is not a strategy in itself. It is a tax treatment that applies when your property runs at a loss. Whether that loss is worth tolerating depends on several factors.

Negative gearing strengthens your position when:

• You are buying in a market with strong long-term capital growth prospects. The annual cash flow losses are manageable if the property appreciates significantly over a 7 to 10 year holding period.
• Your marginal tax rate is high. The higher your tax bracket, the more each dollar of rental loss saves you in tax.
• You have stable, reliable income to cover the shortfall between rent and expenses. If your income drops or you lose your job, a negatively geared property becomes a financial burden.

Negative gearing weakens your position when:

• You are buying in a low-growth market purely for the tax deduction. A $10,000 annual loss only saves you $3,700 in tax at the 37% bracket. You are still $6,300 out of pocket.
• You cannot comfortably cover the holding costs. Cash flow stress is the number one reason investors sell at the wrong time.
• You plan to hold for a short period. Transaction costs (stamp duty, agent fees, legal costs) are significant. Short holds rarely recoup these costs, and you lose the compounding effect of long-term capital growth.

If you are weighing up whether to buy your own home first or invest while renting, our rentvesting guide covers how to think through that decision. And if you are still in the early stages of working out what you can afford, start with our guide to buying an investment property.

The 2026 Federal Budget Changes to Negative Gearing

The Federal Government's 2026-27 Budget announced significant changes to how negative gearing will work from 1 July 2027. These changes are subject to final legislation, but the key details are:

What Stays the Same

According to the Budget, existing arrangements will remain unchanged for all properties held before Budget night (12 May 2026). If you already own an investment property, or you signed a contract before that date, your negative gearing deductions continue to work the way they always have. You can still offset rental losses against your wages and other income.

Investors who buy new builds after Budget night will also still be able to deduct losses from other income. The Government's stated intent is to focus tax support on new housing supply.

What Changes for Established Housing

Investors who buy established housing after Budget night will still be able to deduct rental losses against residential property income. However, according to the Budget, they will not be able to deduct those losses against other income like wages. Unused losses can be carried forward to future years and applied against future residential property income.

This is the fundamental shift. Under the current system, the ability to offset rental losses against your salary is what makes negative gearing attractive for high-income earners. From 1 July 2027, that benefit will only apply to new builds and properties purchased before Budget night.

Capital Gains Tax Changes

The same Budget announced that the Government will replace the 50 per cent Capital Gains Tax (CGT) discount with a discount based on inflation and introduce a minimum 30 per cent tax on gains from 1 July 2027. The CGT reforms will only apply to gains arising after 1 July 2027. Investors in new builds will be able to choose the 50 per cent CGT discount or the new arrangements.

For a detailed breakdown of how these CGT changes affect your investment strategy, see our CGT changes guide.

How Negative Gearing Interacts with Capital Gains Tax

Negative gearing and capital gains tax are two sides of the same investment equation. You accept short-term rental losses (negative gearing) in exchange for long-term capital growth (which is subject to CGT when you sell).

According to the ATO, you make a capital gain when the capital proceeds from selling your rental property exceed the cost base of the property. The cost base includes the purchase price together with certain incidental costs you pay to acquire, hold, and dispose of it, such as legal fees, stamp duty, and real estate agent's commissions.

Under current rules, if you hold a property for more than 12 months, you receive a 50% discount on the capital gain. Under the 2026 Budget changes, this will shift to an inflation-based discount with a minimum 30% tax rate for gains arising after 1 July 2027 (though new build investors can choose the current 50% discount).

The interaction matters because negative gearing losses offset income taxed at your full marginal rate, while capital gains (under current rules) are taxed at half that rate. This asymmetry is part of what makes negative gearing attractive, and part of what the Budget changes are designed to address for established housing.

Record Keeping for Negatively Geared Properties

If your property is negatively geared, meticulous records are essential. The ATO states that you must keep records of everything that affects your capital gains and losses, and penalties can apply if you do not keep records for at least 5 years after the relevant CGT event.

For rental income and expenses, keep:

• Loan statements showing interest paid
• Receipts for every deductible expense
• Depreciation schedules from a qualified quantity surveyor
• Property management statements
• Insurance policies and premium receipts
• Council and water rate notices
• Records of when the property was tenanted versus vacant

If your records are lost or destroyed in a natural disaster, the ATO can help you reconstruct your tax records and make reasonable estimates where necessary.

Next Steps

Negative gearing is a tax outcome, not an investment strategy. The question is never "should I negatively gear?" but rather "does this property's total return, after tax, justify the holding costs?"

With the 2026 Budget changes ahead, the calculus shifts for anyone buying established housing after Budget night. The tax benefit of offsetting rental losses against wages will only apply to new builds and existing holdings.

Whether you are assessing your first investment property or reviewing your portfolio in light of the Budget changes, the fundamentals remain the same. Buy for the right reasons, understand what you can claim, keep your records clean, and model your cash flow conservatively.

Review your rental yield, explore the tax deductions you can claim, or read our full breakdown of the CGT changes.