Negative gearing explained with a worked example: the real after-tax cost

An investment is negatively geared when its deductible expenses, mostly loan interest, exceed the income it produces. Australian individuals can deduct that net loss against other income such as salary, which reduces tax at their marginal rate. The tax saving only offsets part of the loss: at a 32% marginal rate, a $10,000 rental loss saves about $3,200 of tax and still costs you $6,800. Negative gearing therefore only makes financial sense if the investment's long-term capital growth is expected to outweigh the ongoing after-tax losses. Rules for depreciation, travel and loan interest have tightened since 2017, and from 2027–28 negative gearing on many established residential properties bought after the 2026 Budget is limited (see below).

This guide runs through a full 2026–27 example for an investment property, then covers the rules and side effects that change the result. It is illustrative and general; it is not a recommendation to invest.

How the deduction works

Add up rental income for the year (rent, plus insurance payouts for lost rent and some fees).
Subtract deductible expenses: interest, council rates, water, land tax, insurance, strata levies, property management and letting fees, repairs, and depreciation (capital works and eligible plant and equipment).
If the result is negative, it is a net rental loss, deducted from your other assessable income in the same year. If you co-own the property, income and expenses are split according to legal ownership, not by agreement.

Worked example (illustrative, 2026–27)

An employee with a $120,000 salary owns a newly built unit as sole owner. The loan of $600,000 was used entirely to buy the property; interest is assumed at 6%.

Item	Amount
Rent received ($550 a week × 52)	$28,600
Interest (6% × $600,000)	−$36,000
Council rates, water, insurance, strata, management fees	−$8,500
Repairs	−$1,200
Capital works deduction (2.5% × $250,000 construction cost)	−$6,250
Plant and equipment depreciation (new property)	−$2,000
Net rental loss	−$25,350

Tax effect

	Without the property	With the property
Taxable income	$120,000	$94,650
Income tax	$4,020 + 30% × $75,000 = $26,520	$4,020 + 30% × $49,650 = $18,915
Medicare levy	$2,400	$1,893
Total	$28,920	$20,808

Tax saved: $8,112 (which equals $25,350 × 32%).

Cash effect. Of the $25,350 loss, $8,250 is depreciation, which is not cash spent this year. The cash shortfall is $25,350 − $8,250 = $17,100. After the tax saving, the investor is about $8,988 a year out of pocket, or roughly $173 a week, before any principal repayments.

The tax saving is real, but the property has to grow in value by more than the accumulated after-tax losses (plus selling costs and CGT) for the investment to pay off.

What happens when you sell

The capital works deductions claimed reduce the cost base, so they increase the capital gain on sale. If the property is sold for a gain, the part of the gain up to 30 June 2027 can get the 50% CGT discount if it was held for at least 12 months. For CGT events from 1 July 2027 the discount generally ends for individuals and is replaced by indexation, but a qualifying new residential dwelling like the one in this example keeps a 50% discount; a 30% minimum tax on most capital gains also applies from that date. Over time, part of the benefit of negative gearing comes from converting income losses deducted at full marginal rates into a capital gain taxed at half the rate. Whether the overall outcome is positive depends entirely on the property's price movement.

The limit on negative gearing from 2027–28

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 adds section 26-155 to the Income Tax Assessment Act 1997. From the 2027–28 income year, if your deductions for residential dwellings held as residential accommodation exceed the rent from them, the excess is not deductible against salary or other income. It is quarantined: it can reduce certain capital gains on residential property in that year, and anything left is carried forward to offset future residential rental income.

Exceptions keep the current treatment for:

a dwelling (or ownership interest) you acquired before 7.30 pm AEST on 12 May 2026 (Budget night; for a purchase under contract, the contract date counts);
a dwelling that is a new residential dwelling for you, as defined in a ministerial legislative instrument; and
dwellings used for purposes the Minister determines, such as social or affordable housing.

Amendments made in August 2026 (Tax Reform No. 2 Act) extend the pre-Budget and new-dwelling exceptions to interests acquired from a deceased spouse or co-owner and on a relationship breakdown. Widely held unit trusts and complying super funds are not affected. Because whether a dwelling counts as "new" depends on the instrument, check the ATO before you buy.

Rules that change the numbers

Rule	Effect
Second-hand plant and equipment	For residential properties bought after 9 May 2017, depreciation of previously used items (carpets, appliances, blinds) is generally not deductible for individual investors
Travel to residential rentals	Not deductible since 1 July 2017 for most individual investors
Mixed-purpose loans	If part of the loan or a redraw is used for private purposes, only the rental part of the interest is deductible
Vacant land	Holding costs on vacant land are generally not deductible since 1 July 2019 unless a business or a lease applies
Repairs vs improvements	Repairs restoring something to its previous condition are deductible; improvements and initial repairs of defects present at purchase are capital
Rented to family below market rate	Deductions may be limited to the rent received
Land tax	Deductible, but rates and thresholds differ by state and territory

Side effects on other parts of your tax

HELP repayments: a net investment loss is added back to repayment income, so it does not reduce your HELP repayment.
Medicare levy surcharge: net investment losses are added back to income for MLS purposes.
Family and Centrelink payments: net investment losses usually count as income for means tests.
PAYG withholding variation: you can apply to the ATO to reduce tax withheld from your pay during the year to reflect an expected loss, instead of waiting for a refund.

Shares can be negatively geared too

A margin loan or other loan used to buy shares or ETFs can produce a net investment loss if interest exceeds dividends (including franking credits). The same principles apply: the interest is deductible, the loss reduces taxable income, and the gain on sale is a capital gain. See the selling shares example.

FAQ

Is negative gearing being abolished?

Not abolished, but limited. From 2027–28, net losses on established residential property acquired after 7.30 pm on 12 May 2026 can no longer be deducted against other income; they are carried forward instead. Properties acquired before then, new residential dwellings and shares are not affected by this rule. Check the ATO for the detail.

Can I deduct the interest on my own home loan?

No. Interest on a loan for your own home is private, unless part of the property is genuinely rented out, in which case a share may be deductible.

What if my property earns more than its costs?

It is positively geared; the net rental income is added to your taxable income and taxed at your marginal rates.

Do I need a depreciation schedule?

Not legally, but capital works and plant amounts must be supportable. Many investors use a quantity surveyor's report, whose fee is generally deductible.

Sources

Australian Taxation Office — rental properties guide, rental expenses, depreciation, PAYG withholding variation
Moneysmart — ASIC information on property investing and borrowing to invest
Federal Register of Legislation — Income Tax Assessment Act 1997, Divisions 8, 40 and 43