Summary
Negative gearing occurs when an investment property’s costs exceed its rental income — creating a loss that can be deducted from your other taxable income, such as your salary — it has been part of Australian tax law since 1936 and is used by millions of Australian property investors to reduce their annual tax bill while banking on long-term capital growth; the word “gearing” simply means borrowing to invest. Understanding what is negative gearing Australia is essential for any potential investor.
The 12 May 2026 Federal Budget announced the most significant change to negative gearing rules in almost 90 years — properties purchased before 7:30pm AEST on Budget night are fully grandfathered under the existing rules; new builds remain fully eligible for negative gearing regardless of purchase date; for established properties bought after Budget night, rental losses will be quarantined from other income from 1 July 2027
The tax benefit is most valuable for higher-income earners — someone in the 45% tax bracket saves $4,500 in tax for every $10,000 of rental loss; someone in the 32.5% bracket saves $3,250; the math only works if the capital growth of the property exceeds the ongoing shortfall between costs and rent over time
Negative gearing is one of the most talked-about — and most misunderstood — concepts in Australian personal finance. For decades, it has shaped property investment decisions across the country. And in May 2026, the Federal Government changed the rules in a way that will affect every new property investor in Australia for years to come.
What is negative gearing?
Negative gearing occurs when the costs of owning an investment property exceed the income it generates.
The costs of holding an investment property typically include:
- Mortgage interest (the interest component only — not the principal repayment)
- Council rates
- Property insurance
- Property management fees (typically 7-10% of rent)
- Repairs and maintenance
- Depreciation (a non-cash deduction on the building structure and fittings)
- Water and other utility charges paid by the landlord
If the total of these costs exceeds your annual rental income — say your property earns $38,000 in rent but costs $45,000 to hold — you have a net rental loss of $7,000.
Under Australia’s income tax system, that $7,000 loss can be deducted from your other taxable income — your salary, business income, dividends and so on — reducing the amount of income tax you pay.
This is negative gearing. The “negative” refers to the negative cash flow; the “gearing” refers to the fact that the property is purchased with borrowed money.
How negative gearing works — a simple example
Suppose you earn $120,000 per year and own a negatively geared investment property:
| Annual | |
|---|---|
| Rental income | $38,000 |
| Mortgage interest | $32,000 |
| Property management | $3,800 |
| Rates, insurance, repairs | $4,200 |
| Depreciation | $5,000 |
| Total costs | $45,000 |
| Net rental loss | -$7,000 |
Without negative gearing, your taxable income is $120,000 — attracting approximately $31,600 in income tax.
With negative gearing, your taxable income is reduced to $113,000 ($120,000 – $7,000 loss) — reducing your tax bill by approximately $2,275 (32.5% marginal rate × $7,000).
The property still costs you money each week in cash. But the tax saving reduces the real cost of holding it.
The tax benefit by income bracket
The tax benefit of negative gearing depends entirely on your marginal tax rate — the higher your income, the more valuable each dollar of deductible loss:
| Income range (2025-26) | Marginal rate (incl. Medicare) | Tax saved per $10,000 loss |
|---|---|---|
| $18,201 – $45,000 | 21% (19% + 2%) | $2,100 |
| $45,001 – $135,000 | 34.5% (32.5% + 2%) | $3,450 |
| $135,001 – $190,000 | 41% (39% + 2%) | $4,100 |
| $190,001+ | 47% (45% + 2%) | $4,700 |
This is why negative gearing is typically described as a strategy suited to higher-income earners — the tax deduction is simply worth more per dollar of loss at higher marginal rates.
What changed in the May 2026 Budget
The 12 May 2026 Federal Budget announced the most significant reform to negative gearing since the concept entered the tax system in 1936 — passed as the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026.
What changed and what didn’t
| Property type | Purchased when | Tax treatment |
|---|---|---|
| Any property — established or new | Before 7:30pm AEST 12 May 2026 | Fully grandfathered — existing rules apply; losses can still offset salary and all other income |
| Under contract before Budget night | Settlement after Budget night | Also grandfathered — properties under contract before 7:30pm 12 May 2026 are treated as pre-Budget purchases |
| New builds | Any time — including after Budget night | Still fully eligible — investors in new builds can continue to deduct losses against all income types |
| Established residential property | Purchased after 7:30pm 12 May 2026 | Losses can offset salary/other income until 30 June 2027; from 1 July 2027, losses are quarantined against rental income only |
What “quarantined” means
From 1 July 2027, rental losses on newly purchased established properties cannot be used to reduce your salary or other income. Instead, they accumulate in a “quarantine pool” and can only be offset against:
- Future rental income from any property
- Capital gains on eventual sale of the property
This does not eliminate the tax benefit of negative gearing — it defers it. The losses are preserved; they simply cannot be used to reduce this year’s salary.
The CGT changes
Alongside the gearing changes, from 1 July 2027 the 50% capital gains tax (CGT) discount for individuals, trusts and partnerships on residential investment property will be replaced with an inflation-adjusted discount with a minimum 30% tax on gains. These changes only apply to gains that accrue after 1 July 2027 — not to gains built up before that date.
Exception: New builds remain eligible for the existing 50% CGT discount.
Is negative gearing still worth it?
For properties purchased before Budget night: Nothing changes. Existing investors continue under the old rules — losses offset all income, 50% CGT discount preserved.
For new builds purchased at any time: The old rules apply in full — still worth analysing on the same basis as before the Budget.
For established properties purchased after Budget night: Until 30 June 2027, the current rules still apply. From 1 July 2027, the maths changes. The tax benefit still exists — it is just deferred rather than immediate. Whether the strategy works depends on:
- The strength of expected capital growth in that location
- Your cash flow capacity to fund the ongoing shortfall
- Your marginal tax rate and investment timeline
The honest warning: Negative gearing is a tax-deferral strategy tied to a capital growth bet. The tax deduction reduces the cost of holding the property — but it does not make the property a good investment. Only genuine long-term capital growth does that. If you cannot clearly identify why a suburb will grow in value over 7-10 years, do not buy on tax benefits alone.
Deductible expenses — what you can claim
Under the current rules (for eligible properties), the ATO allows deductions for any expense incurred in earning rental income:
Cash expenses:
- Mortgage interest (not principal repayments)
- Property management fees
- Council rates, water rates
- Insurance (landlord, building, contents)
- Repairs and maintenance (not improvements — improvements are capitalised)
- Legal fees for lease preparation
- Advertising for tenants
- Stationery and postage
Non-cash (depreciation) deductions:
- Division 43 — Capital works: The building structure and structural improvements, claimed at 2.5% per year over 40 years
- Division 40 — Plant and equipment: Appliances, carpets, blinds, claimed over each asset’s effective life (a quantity surveyor’s depreciation schedule maximises this)
What is NOT deductible:
- Principal repayments on the mortgage
- Renovations and improvements (these are added to the cost base instead)
- Stamp duty and legal costs at purchase (these are added to the cost base)
- Personal use portions of any expense
Negative gearing vs positive gearing
| Negative gearing | Positive gearing | |
|---|---|---|
| Cash flow | Annual shortfall — property costs more than it earns | Annual surplus — property earns more than it costs |
| Tax treatment | Losses deducted from other income (if eligible) | Surplus added to other taxable income |
| Investor profile | Higher income earners who can fund the shortfall | Investors who want current income rather than deferred growth |
| Strategy | Long-term capital growth bet | Cash flow now |
| Risk | Rate rises, vacancy, weak capital growth | Tax drag on income each year |
FAQs (frequently asked questions)
What is negative gearing in Australia?
Negative gearing is when your investment property’s costs exceed its rental income, creating a loss. That loss can be deducted from your other taxable income (salary, business income) to reduce your annual tax bill. It has been part of Australian tax law since 1936.
Did negative gearing change in 2026?
Yes — significantly. The May 2026 Federal Budget introduced the most significant reform in almost 90 years. Properties purchased before 7:30pm AEST on 12 May 2026 are fully grandfathered. New builds remain fully eligible. For established properties bought after Budget night, rental losses will be quarantined from salary income from 1 July 2027.
Is new build property still eligible for negative gearing?
Yes — new builds are exempt from the Budget changes and remain fully eligible for negative gearing under the existing rules at any time.
Who benefits most from negative gearing?
Higher-income earners — because the tax deduction is worth more at higher marginal rates. Someone on $190,001+ saves $4,700 in tax per $10,000 of rental loss; someone on $45,001-$135,000 saves $3,450.
What expenses can I deduct on a negatively geared property?
Mortgage interest, property management fees, council rates, insurance, repairs, depreciation (Division 40 and 43) and other expenses incurred in earning rental income. Principal repayments and capital improvements are not deductible.
Can I still negatively gear an established property bought after Budget night?
Until 30 June 2027, yes — under transitional rules, the existing negative gearing treatment applies. From 1 July 2027, rental losses will be quarantined and can only offset future rental income or capital gains on sale — not your salary.
Related guides
- What is stamp duty in Australia? →
- How to build a credit score in Australia as a new migrant →
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This guide is for general information only and does not constitute financial or tax advice. Negative gearing rules are subject to change — always consult a registered tax agent or accountant before making investment decisions. Verify current rules at ato.gov.au. Last updated September 2026.
Sources: auinfohub.com.au — Negative Gearing Australia 2026: How It Works (July 19, 2026) | taxbne.com.au — Negative Gearing 2026: Does It Still Work? (May 29, 2026) | nestpath.com.au — Negative Gearing Explained Australia 2026 (May 15, 2026) | loanworx.com.au — Negative Gearing in Australia 2026 (June 10, 2026) | brickbybrickau.com — Negative Gearing Changes 2026 (6 days ago) | alic.com.au — Negative Gearing Explained 2026 (June 11, 2026)
