Introduction
Negative gearing is one of Australia’s most widely used — and most debated — property investment tax strategies. In the 2022-23 financial year (the most recent with complete ATO tax statistics), approximately 2.4 million Australians reported rental property income, and roughly 1.3 million of them — about 54% — declared a net rental loss, meaning their rental expenses exceeded their rental income. The total net rental loss claimed by Australian taxpayers that year was approximately AUD 10.7 billion. Put simply, negative gearing allows an investor to offset a loss from a rental property against their other taxable income (such as salary and wages), reducing their overall tax bill. While the term is most associated with residential property, the same principle applies to any income-producing investment, including shares purchased with borrowed money. This article explains how negative gearing works, the tax mechanics involved, the role of the capital gains tax (CGT) discount, and the current state of the policy debate in 2026.
How Negative Gearing Works: A Worked Example
Negative gearing arises when the costs of owning an investment property exceed the rental income it generates. The costs that can be deducted for tax purposes fall into two categories: cash expenses paid during the year (mortgage interest, council rates, water rates, insurance, property management fees, repairs and maintenance, strata levies, and land tax), and non-cash deductions (depreciation on the building structure — typically 2.5% per year over 40 years for residential properties built after September 1987 — and depreciation on plant and equipment assets such as carpets, blinds, ovens, and air conditioning units).
Consider an investor who purchases a AUD 700,000 apartment in Sydney in 2026 with a 20% deposit (AUD 140,000) and an investment loan of AUD 560,000 at an interest rate of 6.5% per annum. The annual interest on the loan is AUD 36,400. The apartment rents for AUD 600 per week, yielding AUD 31,200 in annual rental income. Other annual costs: council rates AUD 1,500, water rates AUD 800, strata levies AUD 4,000, insurance AUD 1,200, property management fees (7% of gross rent) AUD 2,184, repairs and maintenance AUD 1,000, and depreciation (building and plant) AUD 8,000 first-year estimate. Total annual costs: AUD 55,084. Net rental loss: AUD 55,084 - AUD 31,200 = AUD 23,884.
If the investor’s taxable salary income is AUD 120,000, this AUD 23,884 net rental loss reduces their taxable income to AUD 96,116. The tax saving on a marginal tax rate of 32.5% (plus 2% Medicare levy = 34.5%) is approximately AUD 8,240 for the year. The after-tax cash flow shortfall (ignoring depreciation, which is a non-cash deduction) is: AUD 31,200 (rent) minus AUD 46,284 (cash costs excluding depreciation) = AUD 15,084 negative cash flow before tax. After the tax saving of AUD 8,240, the net after-tax cash flow loss is approximately AUD 6,844 per year, or AUD 132 per week.
Positive vs Negative Gearing vs Neutral Gearing
A property is “positively geared” when the rental income exceeds all costs including interest and depreciation — the investor makes a net profit each year, and that profit is added to their taxable income. Positive gearing is more common in regional areas with high rental yields and in properties purchased with low or no debt. A property is “neutrally geared” when the rental income covers all cash costs (interest, rates, maintenance) but not depreciation — the investor breaks even on cash flow, and the depreciation deduction creates a small paper tax loss with no out-of-pocket holding cost.
The investment case for negative gearing rests on the expectation that capital growth over the holding period will exceed the accumulated annual cash flow losses. If the AUD 700,000 Sydney apartment appreciates by 5% per year (approximately the long-term average for well-located Sydney apartments), it is worth AUD 893,000 after 5 years — a capital gain of AUD 193,000. The total after-tax cash flow losses over 5 years at AUD 6,844 per year amount to AUD 34,220. The net gain before CGT is AUD 193,000 - AUD 34,220 = AUD 158,780.
Capital Gains Tax and the 50% Discount
When a negatively geared property is sold, the capital gain is subject to CGT. If the property has been held for more than 12 months, the investor is entitled to the 50% CGT discount (for individuals and trusts; the discount is 33.3% for complying superannuation funds and does not apply to companies). The discounted capital gain is added to the investor’s taxable income in the year of sale and taxed at their marginal rate. The full amount of depreciation claimed over the ownership period is “recaptured” on sale as a cost-base adjustment, meaning the capital gain is effectively increased by the total building depreciation claimed. Plant and equipment depreciation (Division 40 assets) is not recaptured on sale, but the written-down value of these assets is reflected in the cost base.
Continuing the example: the investor sells after 5 years for AUD 893,000. Total building depreciation claimed over 5 years: approximately AUD 18,000 (assumed AUD 3,600 per year for the building structure component only). The net capital gain before discount is AUD 193,000 + AUD 18,000 (depreciation recapture) = AUD 211,000. After the 50% CGT discount, AUD 105,500 is added to the investor’s taxable income. At a marginal rate of 37% (assuming the gain pushes them into this bracket), the CGT liability is approximately AUD 39,035. The net after-tax gain over the 5-year holding period: AUD 193,000 (capital growth) - AUD 34,220 (after-tax cash losses) - AUD 39,035 (CGT) = AUD 119,745.
The Policy Debate: Should Negative Gearing Be Reformed?
Negative gearing has been a recurring subject of Australian tax policy debate for decades. Proponents of the current arrangement argue that it encourages investment in rental housing, increases the supply of rental properties, and provides an accessible entry point for small-scale “mum and dad” investors to build wealth outside superannuation. The Property Council of Australia and the Real Estate Institute of Australia have consistently advocated for retaining negative gearing, citing ATO data showing that approximately 70% of negatively geared property investors have a taxable income below AUD 100,000 — arguing that it is a mainstream tax arrangement rather than a wealthy-investor loophole.
Opponents argue that negative gearing inflates property prices by subsidising investor demand, makes housing less affordable for first-home buyers, and disproportionately benefits higher-income earners (who receive a larger tax saving per dollar of loss due to higher marginal rates). The Parliamentary Budget Office estimated in 2024 that limiting negative gearing to new properties only (grandfathering existing investments) would save approximately AUD 3.5 billion over the forward estimates. The Australian Greens and some Labor-aligned think tanks have proposed restricting negative gearing to one investment property per taxpayer or capping the total deduction at a fixed dollar amount per year (e.g., AUD 20,000 per property).
As at May 2026, the Albanese government has stated that it has no plans to change negative gearing during its current term, but has not ruled out future reform. The Treasury’s Tax Expenditures Statement 2025 lists the rental property tax concession (negative gearing combined with the CGT discount) as one of Australia’s largest tax expenditures, with an estimated annual revenue cost of approximately AUD 13 billion.
FAQ
Can I negative gear a property that I also live in?
You can only claim deductions for the portion of the property that is genuinely available for rent. If you own a house and rent out two of its four bedrooms to tenants while living in the other two, you may claim 50% of the total property expenses. If you rent the entire property for part of the year and live in it for the rest, you apportion expenses based on the number of days the property was rented versus occupied by you. Short-term rental arrangements (such as Airbnb) are subject to the same apportionment rules.
Is negative gearing only for residential property?
No. The same principle applies to any income-producing investment purchased with borrowed funds, including commercial property, shares, managed funds, and business assets. Interest on a margin loan used to purchase shares that pay dividends is tax-deductible against those dividends and against other income if the dividends are less than the interest — this is the share-market equivalent of negative gearing.
Can depreciation be claimed on a property that was built more than 40 years ago?
Building capital works depreciation (Division 43) is available for 40 years from the date of construction at 2.5% per year for residential properties. Properties built before 1987 (when the current depreciation rules were introduced) that have not been substantially renovated generally cannot claim building depreciation. However, plant and equipment depreciation (Division 40) on newer assets within the property (carpets, appliances, blinds) may still be claimable if the assets were installed after the property was purchased and are used to produce rental income.
Does negative gearing affect my eligibility for other tax offsets or benefits?
Yes. The reduction in taxable income from negative gearing may increase your eligibility for income-tested government benefits and concessions, including the Family Tax Benefit, Child Care Subsidy, and the Medicare Levy Surcharge exemption. Conversely, a positively geared rental profit increases taxable income and may reduce these benefits. This interaction should be considered when modelling the net financial impact of an investment property.
What happens to my negative gearing deductions if interest rates change during the year?
Interest on an investment loan is deductible in the year it is incurred, at the rate actually charged. If your variable-rate loan interest rate changes from 6.5% to 6.0% partway through the year, you deduct the actual interest paid at each rate for each period. The loan statement from your lender provides the total interest paid during the financial year, which is the figure you report on your tax return.
Data Sources
- Australian Taxation Office, Taxation Statistics 2022-23 — Rental Property Schedules
- Australian Taxation Office, Rental Properties Guide 2025-26 (ato.gov.au)
- Treasury of Australia, Tax Expenditures Statement 2025
- Parliamentary Budget Office, Costing of Negative Gearing Reform Proposals, 2024
- Property Council of Australia, Negative Gearing Fact Sheet 2026
- Real Estate Institute of Australia, Property Investment Statistics 2025
Disclaimer: This article provides general information about negative gearing and property investment taxation in Australia and does not constitute financial, tax, or investment advice. Tax law, depreciation rules, and marginal tax rates are subject to change. The worked examples use illustrative figures and do not represent a specific property or investment recommendation. Individuals should consult a registered tax agent or qualified financial adviser before making property investment decisions based on negative gearing.