Negative Gearing Example

A $600,000 apartment, an 80% loan, and a tenant paying $550 a week. This negative gearing example works through every line item, from the interest bill to the depreciation claim, then calculates the tax saving at two different salaries. The final section tracks how the position shifts across five years.

For how negative gearing works as a concept, see the guide to negative gearing in Australia. This page is purely arithmetic.

The Property

The 6.5% rate reflects a typical investor margin above the RBA cash rate of 4.35%, the current target as of June 2026. The property is a 2005-built strata apartment, rented 52 weeks at full occupancy. Annual rent: $28,600.

The Cash Position: Money In vs Money Out

This is what hits the bank account each year, before any tax benefit.

Money in

Money out

The ATO confirms that interest on a loan used to purchase a rental property is deductible, provided the property is rented or genuinely available for rent on commercial terms. Interest alone accounts for $31,200 of the $42,788 total.

Borrowing expenses (loan establishment fees, title search, mortgage documentation, valuation) are spread over five years. This example uses $2,500 in total borrowing costs, producing a $500 annual deduction for years one through five. The full list of deductible rental expenses is in the tax deductions guide.

Annual cash shortfall: $42,788 minus $28,600 = $14,188 per year, or $273 per week.

That is the actual money leaving the investor's pocket before tax.

The Tax Return: Adding Depreciation

The ATO allows one additional deduction that does not require spending any cash: capital works under Division 43.

For residential properties built after 17 July 1985, the ATO allows a deduction at 2.5% per year for 40 years, calculated on the original construction cost. A quantity surveyor report establishes that cost (see the depreciation schedule guide). For this 2005-built property, a conservative construction cost of $180,000 produces a capital works deduction of $4,500 per year ($180,000 × 2.5%).

What about plant and equipment? For a property built in 2005 and purchased in 2026, the existing fixtures (oven, cooktop, air conditioning, carpets) are all second-hand assets. The ATO states that in most cases you can't claim a deduction for second-hand depreciating assets if you are an individual investor and the assets were previously used. This restriction applies to assets in residential rental properties acquired after 9 May 2017. Any new assets you install yourself (a new air conditioner, for example) remain claimable.

Total deductions for the tax return:

Taxable rental loss: $28,600 income minus $47,288 deductions = -$18,688

That $18,688 loss offsets the investor's salary income, reducing the amount of tax they pay.

Tax Saving at Two Salary Levels

The value of the loss depends on your marginal tax rate. For the 2025–26 financial year, the ATO's resident rates (excluding the 2% Medicare levy) are:

The 2% Medicare levy applies on top of these rates.

Investor A: $100,000 salary

Marginal rate: 30% plus 2% Medicare levy = 32 cents per dollar.

Tax saving: $18,688 × 32% = $5,980

Net annual cost: $14,188 cash shortfall minus $5,980 tax saving = $8,208 per year ($158 per week)

Investor B: $160,000 salary

Marginal rate: 37% plus 2% Medicare levy = 39 cents per dollar.

Tax saving: $18,688 × 39% = $7,288

Net annual cost: $14,188 cash shortfall minus $7,288 tax saving = $6,900 per year ($133 per week)

Same property, same tenant, same loan. The higher earner pays $25 less per week because each dollar of loss is worth more against a higher marginal rate.

Five-Year Outlook

On an interest-only loan, the interest bill stays fixed at $31,200. The variable that shifts the position each year is rent. The table below assumes rent increases by $15 per week annually (roughly 2.7%), with other expenses held flat for clarity.

By year five, the $100,000 earner's weekly cost has dropped from $158 to $117. The $160,000 earner is under $100 per week.

Two things this table holds constant that will move in practice: council rates and insurance tend to rise 3–5% annually, which offsets some of the rent gain. And the borrowing expense deduction ($500 per year) expires after year five, slightly reducing the taxable loss from year six onward.

What Shifts These Numbers

A few variables have outsized impact on the result.

Interest rate. Every 0.25% movement on a $480,000 loan changes the annual interest bill by $1,200. If rates fell from 6.5% to 5.5%, the cash shortfall drops by $4,800 per year, but so does the tax deduction, meaning the net benefit of negative gearing shrinks.

Vacancy. The example assumes 52 weeks of rent. Each vacant week costs $550 in lost income and increases the cash shortfall accordingly.

Loan structure. Switching from interest-only to principal and interest reduces the deductible portion (only interest is deductible, not principal repayments) while increasing cash outflow. The cash shortfall widens, but the taxable loss shrinks because less interest is being charged.

Construction cost estimate. The $4,500 capital works figure depends on the quantity surveyor's assessment. A higher verified construction cost increases the deduction; a lower one reduces it. The rate itself is fixed by the ATO at 2.5% per year.

Running Your Own Numbers

The worked example above uses a single set of assumptions. Your purchase price, rent, interest rate, and salary will produce different figures. The mechanics stay the same: calculate the cash shortfall, add the depreciation deduction, multiply the total loss by your marginal rate plus the 2% Medicare levy, then subtract the tax saving from the cash shortfall.

If you want help modelling the numbers for a specific property, book a free strategy session to walk through it with a coach.