Negative Gearing Australia — How It Works & Real Tax Savings

Negative gearing is one of the most widely used — and commonly misunderstood — tax strategies available to Australian property investors. In 2025-26, approximately 1.3 million Australians claimed rental deductions.

This guide explains how negative gearing works in Australia, walks through the tax mechanics with real numbers, and covers the expenses you can claim, common mistakes, and the ongoing reform debate.

What is negative gearing?

Negative gearing occurs when the total deductible expenses of owning an investment property exceed the rental income it generates, creating a net rental loss for the financial year. In Australia, that net rental loss can generally be deducted from your other income — such as your salary and wages — reducing your overall taxable income and the tax you pay.

The concept is straightforward: the ATO allows you to offset rental property losses against other income because the property is held for the purpose of producing assessable income (ATO — Residential rental properties). The tax benefit does not eliminate the loss. It reduces the real cost of holding the property by lowering your tax bill.

Negative gearing is not unique to property. It can apply to any investment held on borrowed funds where the costs exceed the income (such as shares purchased on margin). However, it is most commonly associated with residential investment property in Australia.

How does negative gearing work? The tax mechanics

Australia uses a progressive tax system with marginal tax brackets. This means every dollar of income above a threshold is taxed at a higher rate. When negative gearing reduces your taxable income, the tax saving occurs at your marginal rate — the rate on your highest dollars of income.

This is why negative gearing benefits higher-income earners more, in absolute dollar terms. A $15,000 rental loss saves $4,500 for someone in the 30% bracket, but $6,750 for someone in the 45% bracket. The loss is the same size; the tax saving is larger because the marginal rate is higher.

How the deduction flows through your tax return

1. You add up all rental income for the year (rent received, minus any vacancy periods).
2. You add up all deductible expenses (interest, rates, insurance, management, depreciation, etc.).
3. If expenses exceed income, the difference is your net rental loss.
4. That loss is subtracted from your other income (salary, wages, business income) on your tax return.
5. Your total taxable income is lower, so you pay less tax.

The tax saving is the difference between the tax you would have paid without the property and the tax you pay with it.

Tax saving by marginal rate

The table below shows the estimated annual tax saving for a $15,000 net rental loss at each 2025-26 marginal tax rate (assuming Medicare levy at 2%).

This table assumes the full 2% Medicare levy applies. In practice, the levy can be reduced or not payable below certain thresholds (which depend on the income year and your circumstances).

Source: (ATO — Tax rates for Australian residents) (ATO — What is the Medicare levy). 2025-26 rates for Australian residents.

The higher your marginal rate, the more each dollar of rental loss saves you. For someone earning $120,000 (32% marginal rate including Medicare), a $15,000 rental loss reduces the after-tax cost of that loss to approximately $10,200 for the year.

Cash flow negative gearing vs tax negative gearing

This is a distinction many investors miss, and it changes how you think about your property’s real cost.

Cash flow negative gearing is the actual money leaving your bank account. It is the gap between the rent you receive and the cash expenses you pay: mortgage interest, council rates, insurance, property management, repairs, body corporate, and land tax. If you receive $25,000 in rent but pay $35,000 in cash expenses, you are cash-flow negative by $10,000 per year.

Tax negative gearing includes non-cash deductions — primarily depreciation (Division 43 building structure and Division 40 plant and equipment). These deductions increase your net rental loss for tax purposes, which increases your tax saving, but they do not cost you anything out of pocket.

Why this matters

A property can be cash-flow neutral (rent covers all cash expenses) but still be negatively geared for tax purposes because depreciation creates additional deductions. In this scenario, you are not losing money week to week, but you are still receiving a tax refund. This is the most favourable position: no cash drain, but a tax benefit.

Example: A property generates $30,000 in rent and has $30,000 in cash expenses (break-even). With $8,000 in depreciation deductions, the tax position shows an $8,000 net rental loss. At a 32% marginal rate, that generates a $2,560 tax saving — a net positive cash position despite zero cash loss on the property.

This is why depreciation schedules are important — without one, investors cannot claim Division 43 or Division 40 deductions that the ATO allows for eligible properties.

What expenses can you claim through negative gearing?

Deductible rental property expenses are the costs that create or enlarge a negative gearing loss. The ATO publishes detailed guidance on rental expenses you can claim. The main categories are listed below.

Immediately deductible expenses

These expenses are claimed in full in the year they are incurred:

• Loan interest — the interest portion of your mortgage repayments (not principal), and only for the investment portion of the loan. This is typically the single largest deduction.
• Council rates — rates levied by your local council.
• Water charges — rates and usage charges (though the tenant may pay usage).
• Landlord insurance — building, contents, and landlord cover.
• Property management fees — agent fees and letting commissions, usually 5-8% of rent collected.
• Repairs and maintenance — costs to restore something to its original condition (not improvements; see below).
• Body corporate / strata fees — administration fund levies for apartments and townhouses (not special purpose capital levies).
• Land tax — the state-based tax on your investment property land value. Rates vary by state. See our land tax calculator for a state-by-state comparison.
• Pest control, cleaning, gardening — if you pay for these services on the property.
• Advertising for tenants — costs of advertising the property for rent.
• Stationery, phone, postage — costs directly related to managing the property.
• Quantity surveyor fees — the cost of obtaining a depreciation schedule (deductible in the year paid).

Depreciation (non-cash deductions)

Depreciation does not require a cash outlay in the year it is claimed, but it can significantly increase your tax deduction:

• Division 43 (capital works) — covers the building structure itself, typically claimed at 2.5% per year of the original construction cost over 40 years (ATO — Capital works deductions (Div 43)). Applies to both new and second-hand buildings constructed after 15 September 1987.
• Division 40 (plant and equipment) — covers fixtures, fittings, and appliances (carpet, blinds, hot water systems, air conditioners, etc.). For properties purchased after 9 May 2017, Division 40 can only be claimed on new items that you install yourself, not second-hand items already in the property (ATO — Second-hand depreciating assets (depreciation section)). Items are depreciated over their effective life as determined by the ATO.

A qualified quantity surveyor prepares a depreciation schedule that identifies all claimable items and their deduction amounts. Reports typically cost $500-$770 and the fee is itself tax-deductible.

Repairs vs improvements: a critical distinction

The ATO draws a clear line between repairs and improvements, and getting this wrong is a common audit trigger:

• Repair: Restoring something to its original condition. Immediately deductible. Example: fixing a leaking roof, replacing a broken window pane with the same type, repainting a wall the same colour.
• Improvement: Making something better than the original condition, or replacing it with something substantially different. Must be depreciated as a capital expense. Example: replacing a basic kitchen with a premium kitchen, adding a new room, converting a carport to a garage.

If you are unsure, the ATO’s guidance on rental expenses provides detailed examples.

Worked example: $500,000 investment property

The following example uses realistic numbers for a typical Australian investment property to illustrate how negative gearing works in practice.

James earns $100,000 per year as a salary and owns a $500,000 investment apartment in Brisbane. He has a $400,000 interest-only loan at 6.2% interest. Weekly rent is $480 and the property is tenanted for 50 weeks of the year.

Income

Expenses

Negative gearing calculation

What does this property actually cost James?

In this scenario, the after-tax holding cost is approximately $101 per week. The pre-tax cash outflow is $211 per week, but the tax benefit reduces the net cost substantially. This figure does not account for any potential capital growth.

Note that $7,000 of the deductions (depreciation) are non-cash. James’s actual cash loss is $10,980 per year, but his tax loss is $17,980 because depreciation adds $7,000 in deductions that do not require any out-of-pocket spending.

The negative gearing calculator can estimate this scenario with different inputs.

The negative gearing reform debate

Negative gearing has been a politically contentious topic in Australia for decades. Here is a brief summary of the key positions and the current status.

What has been proposed?

The most prominent reform proposal came from the Australian Labor Party before the 2019 federal election. The proposal would have:

• Limited negative gearing to newly constructed properties only (no longer available for existing properties).
• Grandfathered existing investors — anyone who already owned a negatively geared property could continue to claim under the current rules.
• Reduced the CGT discount from 50% to 25% for assets purchased after the start date.

The Coalition opposed the changes, arguing they would reduce property investment and push rents higher. Labor lost the 2019 election and subsequently dropped the policy before the 2022 election.

Current status (February 2026)

As of February 2026, no changes to negative gearing have been legislated. The rules remain as they have been: rental losses can be offset against all other income, for both new and existing properties. Both major parties have been cautious about revisiting the issue, though it remains part of broader housing affordability discussions.

This guide and our calculator reflect the current rules. If changes are announced, we will update accordingly.

Common negative gearing mistakes

These are the most common mistakes investors make with negative gearing.

1. Claiming principal repayments. Only the interest portion of your mortgage is deductible. Principal repayments reduce your loan balance but are not a tax deduction. This is the single most common error.

2. Confusing repairs with improvements. A repair restores something to its original condition (immediately deductible). An improvement makes it better (must be depreciated). The ATO scrutinises this distinction closely.

3. Not getting a depreciation schedule. Depreciation can add $5,000-$15,000 per year in non-cash deductions for a typical property. Without a quantity surveyor’s report, you may miss these entirely.

4. Claiming expenses when the property is not genuinely available for rent. If the property is vacant but not advertised at a market rate, or if you use it personally, the ATO may disallow deductions for that period.

5. Not apportioning mixed-use loans. If you redrew from your investment loan for personal use, only the investment portion of the interest is deductible. This requires careful record-keeping.

6. Forgetting to account for depreciation’s CGT impact. Division 43 deductions reduce your cost base when you sell, increasing your capital gain. This does not mean you should skip depreciation — the annual tax savings typically outweigh the eventual CGT impact, especially with the 50% discount — but you should plan for it. See our capital gains tax guide for more. If the property was your main residence before you rented it out, you may also qualify for the CGT 6-year absence rule, which can exempt the gain entirely.

7. Not applying for a PAYG withholding variation. If your property generates a consistent tax refund, you can apply to reduce the tax withheld from your salary during the year (ATO — Varying your PAYG withholding), improving your monthly cash flow rather than waiting for a lump sum at tax time.

How to model your negative gearing position

To understand your property’s true after-tax cost, you need three numbers:

1. Net rental loss — total deductions minus rental income.
2. Tax saving — the net rental loss multiplied by your marginal tax rate (approximately).
3. After-tax cost — your cash out-of-pocket minus the tax saving.

Our free negative gearing calculator computes all three using current 2025-26 ATO rates, including Medicare levy and LITO. Enter your salary, rental income, and expenses to see a personalised estimate.

The premium property investment spreadsheet integrates negative gearing with CGT, depreciation, land tax, and rental yield for multi-property and multi-year modelling.

Disclaimer

This guide is general information only and is not tax advice, financial advice, or a recommendation to buy, sell, or hold any investment property. Tax rules change, and outcomes depend on your individual circumstances. The examples use illustrative figures and simplified calculations — actual results may differ. Consider speaking with a registered tax agent or licensed financial adviser for advice specific to your situation. We are not affiliated with the ATO or any state revenue office.