Negative Gearing in Australia: What It Is and How to Calculate It

Short answer

Negative gearing is when the costs of owning an investment property are higher than the rent it earns — so you run a loss, and you claim that loss against your other taxable income (usually your salary) to pay less tax. The strategy is "geared" because it's powered by borrowed money, and "negative" because income minus expenses comes out below zero. It does not put cash in your pocket; it softens the loss. And from 1 July 2027 the rules change for many properties, so if you're weighing up an investment property, now is the time to understand exactly how the numbers work.

Key facts

What is negative gearing?

Buy an investment property and two money flows start at once. Rent comes in. Expenses go out — mostly loan interest, but also council rates, insurance, property management fees, repairs, and a couple of non-cash items like depreciation. When the expenses add up to more than the rent, the property runs at a loss.

Under the current rules, that loss is not quarantined to the property. You can deduct it against your other income — your salary, your business, your dividends — which lowers your taxable income and therefore your tax bill. The mechanics are set out in the ATO's rental expenses guidance: rental income is assessable, and the expenses you genuinely incur to earn it are deductible.

The catch — and it's a big one — is that the tax saving only ever covers a fraction of the loss. If you're in the 32% marginal bracket, a $14,000 loss saves you about $4,480. The other $9,520 still has to come out of your own pocket, every single year. Negative gearing is, at its core, a bet that capital growth will more than repay that annual shortfall.

A worked example, with real numbers

Say Ava earns a $120,000 salary and buys an investment unit.

Without the property, Ava's taxable income is $120,000. With it, the $14,000 loss drops her taxable income to $106,000. That whole loss sits in the $45,001–$135,000 bracket, taxed at 30% plus the 2% Medicare levy — a 32% marginal rate. Her tax saving is $14,000 × 32% = $4,480.

So the headline "I'm $14,000 in the red" is really a cash shortfall of $9,520 a year — about $183 a week — after tax. Understanding that gap is the single most important part of negative gearing, because it's real cash leaving your account every week, not a paper number. If you're unsure how the brackets work, read how Australian tax brackets work before going further.

What can you actually claim?

The ATO's common property expenses list is the definitive guide, but here are the big-ticket items:

• Loan interest — almost always the largest deduction, and the main reason gearing is "negative". You can claim interest on money borrowed to buy the property, but if you redraw for private spending, that portion is not deductible.
• Running costs — council rates, water charges, land tax, insurance, body corporate fees, property management fees, cleaning, gardening, and pest control.
• Repairs and maintenance — fixing wear and tear (a genuine repair, not an improvement).
• Depreciation — two types. Capital works lets you write off the building structure at 2.5% a year over 40 years; plant and equipment covers things like carpets, ovens, and air conditioners as they decline in value.

One condition covers all of it: the property must be rented out, or genuinely available for rent on commercial terms. A holiday home you use yourself doesn't qualify the same way.

The 2026 Budget changes you need to know

In the 2026 Federal Budget, the Government announced a major shift. The Treasury media release spells out what changes from 1 July 2027:

• Negative gearing is limited to new builds. Investors buying established residential property after 7.30pm AEST 12 May 2026 will no longer be able to deduct rental losses against salary or other non-property income. Losses can only offset residential property income — rent or capital gains — and any excess is carried forward to future years.
• Existing investments are grandfathered. If you owned a property (or had signed a contract) before 7.30pm on 12 May 2026, nothing changes — you keep the current rules until you sell.
• New builds stay fully eligible. To steer investment toward new housing supply, new-build investors can still offset losses against all income, and can choose between the existing 50% CGT discount and the new indexation arrangements.
• CGT is changing too. From 1 July 2027 the 50% capital gains discount is replaced by inflation-adjusted indexation, with a minimum 30% tax on realised gains — applying to all assets except new homes.

The practical takeaway: if you're buying an established investment property now, you have until 30 June 2027 to negatively gear it the old way. After that, the loss can only offset property income. Moneysmart's buying an investment property guide walks through the wider risks worth weighing before you commit.

What this means for you

If you already own an investment property, breathe easy — you're grandfathered. If you're planning to buy, the type of property matters more than it ever has: a new build keeps the full negative gearing benefit, while an established home bought after May 2026 loses the salary offset from July 2027. When you eventually sell, the capital gains tax rules will also look different, so factor that into your long-term return. If you're weighing whether to rent out a place while living somewhere else, Ava's rentvesting guide covers that exact decision.

Is negative gearing worth it?

Only if three things are true. You're in a high marginal tax bracket — the higher your rate, the bigger the tax saving. You can sustain the cash shortfall — $183 a week is the reality in the example above, and it rises if rates climb or the property sits vacant. You're confident in capital growth — negative gearing only makes sense if the property's eventual gain beats the years of after-tax losses you bankroll along the way.

It is not free money, and it is not a tax loophole. It's a legitimate, standard application of the tax law — but it's still a loss, and a loss only pays off if the asset grows. Plenty of Australians have built wealth this way, and plenty have been burned when prices flatlined and rates rose at the same time.

The takeaway

Negative gearing is simple to understand and easy to get wrong. The formula is: work out your net rental loss, multiply it by your marginal rate, and that's your saving — but the rest is cash out of your pocket, every week, until the property grows enough to pay you back. With the rules changing on 1 July 2027, your timing and your choice of property matter more than ever.

If you're new to the whole tax side of investing, start with Ava's Australian tax return guide to see how rental losses, deductions and your return all fit together.