What is negative gearing and how does it work?

What is negative gearing?

The term ‘gearing’ refers to borrowing money to buy an asset, like how a property investor might take out a loan to buy a house. ‘Negative gearing’ is when the rental income the investor earns from this house is less than the cost of interest on their loan and other expenses like rates and repairs, allowing them to claim a tax deduction.

Negative gearing isn’t just for houses–nearly all investment classes can be negatively geared if they cost more to hold than they earn in a given year. That said, if someone mentions negative gearing in Australia, they’re probably talking about how losses on investment properties can be treated at tax time.

Negative gearing and tax: the lowdown

Negative gearing can see investors paying less tax than they otherwise would, but proposed tax changes could soon restrict negative gearing tax deductions to investors buying new properties.

Just like how a tradie can deduct the cost of tools or someone working from home might deduct home office expenses, property investors can deduct costs related to their investment properties from their taxable income. If an investor has a negatively geared property, however, they can go one further, deducting costs related to their investment property from income from other sources, such as their salary.

Here’s an example of how negative gearing currently works at tax time:

Sarah earns a salary of $100,000 at her regular job, potentially attracting around $20,800 of income tax in the financial year 2025-26.

However, Sarah also owns an investment property. It brought in $25,000 of rent and cost her $35,000 in home loan interest, property maintenance, and council rates that financial year.

Because her property-related expenses are higher than her rental income, her property is negatively geared, leaving her with an investment loss of $10,000. At tax time, Sarah can offset that loss against her other income:

• Taxable income: Drops from $100,000 to $90,000 ($100,000-$10,000)
• New tax bill: around $17,800
• The result: a $3,000 tax saving, softening the overall loss realised on the investment property to just $7,000 that tax year

Negative gearing on the chopping block?

The 2026 Federal Budget saw negative gearing in the headlines. The Federal Government proposed that the negative gearing tax deduction may be restricted to new properties–those that haven’t been lived in before.

The government believes that, if it passes parliament, the new rules will discourage investors from buying existing properties and encourage construction of new houses and apartments. This is expected to boost housing supply in Australia, providing more opportunities for first home buyers.

“Over 80% of new investor lending goes to existing homes, and we want more investment to back the construction of new supply,” Treasurer Jim Chalmers said. “Our negative gearing changes put homeowners first and will help more Australians get a foothold in the housing market.”

Crucially, losses realised on all investment properties purchased before 12 May, 2026 will still be eligible for the deduction.

Additionally, costs related to owning an investment property will still be able to be deducted from the rental income realised by that specific property–whether it’s new or old. But losses won’t be able to reduce tax payable on other income from 1 July 2027.

What’s the difference between negative and positive gearing?

The difference between a negatively geared property and a positively geared one ultimately comes down to whether or not it’s making a day-to-day profit.

• Positive gearing means rental income is greater than costs like home loan interest, insurance, rates, maintenance, and management fees. It also means an investor will need to pay income tax on any profit made.
• Negative gearing means those running costs outpace rental income. Because an investor is making a cash loss, they may be able to offset that loss against their other taxable income, reducing how much tax they pay on, say, their regular salary.

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What investment property expenses can be claimed as tax deductions?

According to the ATO, your tax-deductible expenses can include:

• The cost of advertising for tenants
• Body corporate fees
• Insurance costs for the property
• Real estate agent fees and commissions
• Home loan interest and fees
• Repairs and maintenance costs

The ATO’s website provides a full list of rental property expenses that may and may not be considered ‘tax-deductible’.

If you plan to claim tax deductions related to an investment property, you should keep official documentation of the expenses, including bank statements and receipts.

Depreciation and negative gearing

On top of actual out-of-pocket expenses, you might be able to deduct the ‘cost’ of depreciation. When it comes to investment properties, depreciation may simply be referred to as wear and tear.

It recognises that buildings and their contents–like appliances and carpets–lose value, and investors may be able to deduct a set portion of certain costs over time.

These on-paper depreciation costs can also potentially be deducted from an investors’ income and, if eligible, could lead to an investment being negatively geared.

When you can’t deduct investment property costs

Importantly, you can only deduct costs borne from an investment property that is either rented or genuinely available for rent. That means if you own a holiday home and rent it out most of the time but stay there for 5% of the year, you’ll probably lose the ability to claim 5% of expenses.

The same applies if you’re not renting the home out for a time–any costs related to the period it’s unavailable for rent can’t be deducted.

And be warned: when it comes to the requirement that a property must be genuinely available for rent, the ATO can see through tricks. If you’re advertising a property for rent at an exorbitant price or with exclusionary conditions just to claim the tax breaks, you might find yourself facing a tax audit.

Pros and cons of negative gearing

As with any tax or investment strategy, there are potential benefits and drawbacks to negative gearing, including:

Pros

1. Potential tax savings

Property investors may be able to use negative gearing to minimise their investment losses, offsetting other taxable income. This can be particularly impactful for investors in higher tax brackets, as deducting $1 could theoretically save 47 cents in tax (earnings over $190,000 are taxed at 45 cents per dollar, plus a 2-cent-per-dollar Medicare Levy).

In addition, if your losses exceed your total income for a financial year, you may be able to ‘carry it forward’, reducing your taxable income in coming financial years too.

2. Capital growth

Negative gearing can help an investor afford to keep hold of a loss-making property in the short term, on the assumption it could grow in value over the long term.

3. More property options to choose from

Historically, negative gearing may have opened investors up to more expensive property markets where rental yields might be lower but the potential for capital growth appears greater.

Cons

1. Cash flow risks

The hard and fast truth is that if you’re negatively gearing, your investment is actively losing money. Loss-making properties can eat into your cash flow, even if you minimise these losses by paying less tax. Losses can be exacerbated if your property is unexpectedly empty (perhaps if tenants move out and you can’t find new ones quickly), interest rates rise (increasing the cost of your home loan repayments), or you have to make unexpected repairs to the property.

2. Investment risks

As the saying goes, past performance does not guarantee future results. Property values can fluctuate, rental demand can drop, and there’s no guarantee a property will actually experience the capital growth you might anticipate.

A worst-case scenario is that you’re forced to sell the property for less than what you originally bought it for.

3. Can affect your borrowing power

Because negatively geared properties represent a regular out-of-pocket expense, lenders will factor that loss into your serviceability–your ability to comfortably make loan repayments. If you apply for a new mortgage down the track, a negatively geared property can reduce how much a lender is willing to let you borrow.

4. The rules are changing

The tax treatment of negative gearing is facing a major shakeup. If proposed changes pass parliament, investors wanting to negatively gear a property to reduce the tax payable on their other income will need to buy or build a new home.

This introduces a whole other set of risks, because buying a new property can mean premium prices, construction woes, and an entirely different supply-demand dynamic (brand new estates or apartment buildings can see hundreds of near-identical houses or units hitting the market at the same time).

Is negative gearing right for me?

The decision of whether or not to buy an investment property with the intent to save tax with negative gearing has become more complicated since the 2026 Federal Budget. Now, it not only comes down to ‘should I buy a loss-making property’ but potentially also ‘should I buy a brand new, loss-making property’.

The benefits and risks of building a property versus buying one has been long-debated by homebuyers and investors. Additionally, suggested changes to negative gearing mean that new properties must add to housing stock. As it stands, knock-down-rebuilds and substantial renovations of existing homes won’t count as properties that can be negatively geared, though subdivisions or duplexes built to replace single dwellings might.

If you’re considering buying a new property in order to negatively gear, remember that the tax deduction only allows you to minimise investment losses–you’ll have to cover the shortfall out of your own pocket.

This might make sense if the profit made when you eventually sell the property is vastly larger than the cash you lost while holding it, but that’s not guaranteed to happen.

It’s probably worthwhile to chat with a financial adviser or tax accountant to make sure you’re making a suitable decision for your financial circumstances before you decide to go all-in on negative gearing.

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