What is negative gearing and how does it work in Australia?

Disclaimer: This article provides general information and guidance only and does not constitute financial, taxation, or legal advice. You should seek independent professional advice before making any investment decisions.

Key takeaways

• Negative gearing explained simply: when your property costs more to hold than it earns in rent, and you use that loss to reduce your taxable income.
• The strategy may work best when combined with long-term capital growth, a steady employment income, and a sound location choice.
• Key claimable expenses may include loan interest, management fees, repairs, depreciation, and insurance.
• Negative gearing is not without risk. Ongoing cash flow pressure, market stagnation, and interest rate movements can all affect the outcome.
• It remains a legal and widely used strategy in Australia, but individual suitability varies. Always seek independent financial and tax advice before making investment decisions.

Negative gearing is one of the most widely used property investment strategies in Australia. According to the ATO's Taxation Statistics 2022–23, there were just over 2.26 million individuals with an interest in a rental property, and nearly half of them, around 1.1 million, were negatively geared. Collectively, those investors claimed ~$54.5 billion in deductions that year.

This guide breaks down what negative gearing is, how it works in practice, and what you need to consider before deciding if it's the right approach for you.

What is negative gearing?

Negative gearing meaning, in its simplest form, is when the costs of owning an investment property exceed the rental income it generates. Put another way, your property is running at a loss, but that loss can be offset against your other income, such as your salary or income from other rental properties, to reduce the total amount of tax you pay.

In Australia, this tax treatment is allowed under the Australian Taxation Office (ATO) rules, which permit investors to deduct investment property losses from their assessable income. The strategy is based on the expectation that any short-term losses will be outweighed by long-term capital growth in the property's value.

Important Note: The 2026 Federal Budget has proposed significant changes to negative gearing rules. From 1 July 2027, the ability to offset rental losses against your personal salary will be exclusive to newly built properties. If you purchase an established home today, you will be able to offset your losses against your personal income only until 30 June 2027. After this date, you can offset property expenses against your rental income, but any net losses can no longer be used to reduce your regular income tax (though investments purchased prior to the budget announcement are expected to be 'grandfathered', meaning they would continue to operate under the existing rules).

How does negative gearing work?

Negative gearing occurs when the costs of owning a rental property exceed the income it generates.

How it works in practice

When you own an investment property, you receive rental income but also incur a range of expenses, including but not limited to:

• Mortgage interest
• Property management fees
• Council rates
• Insurance
• Repairs and maintenance

If your total expenses are higher than your rental income, the result is a net loss. This loss is generally tax-deductible.

Tax impact

The loss can be used to reduce your overall taxable income.

Example:

• Employment income: $100,000
• Net property loss: $10,000
• New taxable income: $90,000

Depending on your marginal tax rate, this reduction can lead to a meaningful saving on your annual tax bill.

Important to understand: The tax benefit does not remove the cash loss, you still need to cover the shortfall from your own funds. The strategy typically relies on a combination of tax savings today and the expectation of capital growth in the property over time.

Negative gearing example in property

To illustrate with a real-world negative gearing example:

• Purchase price: $650,000
• Annual rental income: $26,000 ($500/week)
• Annual mortgage interest: $30,000
• Other expenses (management fees, rates, insurance, maintenance): $6,000
• Total annual costs: $36,000
• Annual shortfall (loss): $10,000

If you're on a marginal tax rate of 37%, that $10,000 loss reduces your tax bill by $3,700. So, while you're out of pocket $10,000 for the year, you receive $3,700 back through your tax return. This benefit is a reduction of your total tax liability; it is not a direct cash reimbursement of your property's loss. That means your effective cash cost is $6,300.

The underlying expectation is that the property appreciates in value over time. If it grows by just 5% in a year, that represents a $32,500 increase, well ahead of the shortfall costs.

Benefits of negative gearing

There are several well-recognised benefits of negative gearing for Australian property investors.

Tax reduction

Losses offset your taxable income, lowering the amount of tax you pay each year.

Access to capital growth

You can hold a property through its growth phase even while it's running at a loss.

Portfolio-building potential

Allows investors to enter the market and build wealth over time, particularly when combined with strong long-term growth locations.

Broad eligibility

Most Australian taxpayers earning income from a salary or other sources can access negative gearing provisions, not just high-income earners.

Note: The benefits only materialise meaningfully if the property appreciates. The strategy is most effective in locations with demonstrated long-term capital growth, which is one reason location research matters so much when exploring residential properties and considering real estate investment strategies.

Risks and downsides of negative gearing

Like any investment approach, negative gearing comes with considerations that are worth weighing carefully.

Ongoing cash flow pressure

You'll need to consistently cover the shortfall between rental income and costs. This requires stable employment income and financial reserves.

Capital growth dependency

If property values stagnate or fall, the tax benefit alone may not justify the losses.

Interest rate sensitivity

Rising mortgage rates increase your costs and widen the gap between income and expenses.

Vacancy periods

An untenanted property still incurs costs with no rental income to offset them.

Policy changes

Tax treatment of negative gearing is subject to legislative change, and any adjustments to ATO rules could affect the financial case for the strategy.

What expenses can you claim under negative gearing?

According to the ATO, the following property investment expenses are generally tax deductible in the year they are incurred:

• Interest on the investment loan (this is typically the largest deductible expense)
• Property management fees paid to a licensed agent
• Maintenance and repairs (note: improvements may need to be depreciated rather than immediately deducted)
• Building and capital works depreciation
• Insurance premiums (landlord and building insurance)
• Council rates and water charges
• Body corporate/strata fees
• Advertising for tenants

Depreciation is a particularly useful deduction for newer properties, as it allows you to claim a portion of the building's cost and the value of fittings each year, without any actual cash outlay. The ATO's guide on rental properties outlines the full scope of what's claimable. For investors considering newer or off-the-plan properties, depreciation can improve the overall return on the strategy.

Negative gearing vs positive gearing

Understanding the difference between the two helps clarify where each strategy fits:

Neither approach is universally better.

Positive gearing may suit investors who prioritise steady income and lower short-term financial pressure.

Negative gearing may suit those with sufficient employment income and a longer investment horizon, who are comfortable accepting short-term losses in exchange for potential capital growth.

Your choice will depend on your income level, financial position, tax rate, and investment goals. Some investors hold a mix of both within a broader portfolio.

Who typically uses negative gearing?

According to ATO Taxation Statistics 2022–23 (Table 8), 1,117,175 Australians were negatively geared in that year, spanning investors with one property through to those holding six or more, suggesting the strategy is used across a broad range of investor profiles rather than a single type. It generally tends to be most beneficial for:

• Salaried employees with a consistent, taxable income
• Investors in higher marginal tax brackets, where the tax offset has greater value
• Those with a medium-to-long investment horizon
• Investors who have sought independent financial and tax advice

It's also worth knowing that the strategy isn't limited to experienced investors. If you're considering purchasing your first home as an investment property (sometimes called “rentvesting”), negative gearing can form part of that plan. Although, this approach involves trade-offs that are worth understanding clearly before committing.

Is negative gearing still relevant in 2026?

Yes, the strategy remains legally available and widely used, though the context has shifted considerably. The RBA raised the cash rate twice in early 2026, bringing it to 4.35% as of May 2026, which directly increases holding costs for investors with variable-rate loans and widens the monthly shortfall between rental income and mortgage repayments.

On the policy end, The Federal Budget 2026 also introduced significant changes, with negative gearing benefits set to be limited to new residential developments from July 2027, while existing investments are largely grandfathered under current rules. This means the strategy remains available, but the way it is applied is evolving, particularly for future investors entering the market.

At the same time, rental demand remains strong. According to SQM Research, Australia's national residential vacancy rate fell to 1.2% in April 2026, one of the tightest readings on record, indicating that tenanted properties face very low risk of sitting vacant.

Whether the strategy makes sense for you right now comes down to:

• The property's location and its projected capital growth potential
• Your borrowing capacity and ability to fund ongoing shortfalls at current interest rates
• Your marginal tax rate and the value of the offset available to you
• Your overall financial goals, such as whether you are building a portfolio over the long term

The rent vs buy decision for your own home will also influence how much borrowing capacity you have available for investment purposes. Equally, strategies like rentvesting, where you rent where you want to live and invest where the numbers make sense, are worth exploring if you are navigating affordability pressures.

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