Negative gearing: worked examples before and after tax

A property is negatively geared when the deductible costs of holding it, mainly loan interest, exceed the rent it earns. Where the tax rules allow that loss to be offset against other income such as salary, the investor pays less income tax, and the saving equals the loss multiplied by the investor's marginal tax rate. The saving only ever recovers part of the loss. An investor on the highest marginal rate still bears more than half of every dollar lost.

The rules are also changing. Treasury states that from 1 July 2027 negative gearing of residential property will be limited to new builds, with properties held before 7:30pm AEST on 12 May 2026 exempt. The worked examples below therefore apply only to properties that remain eligible. All figures are illustrative and general in nature. A registered tax agent can confirm how the rules apply to a particular property.

What negative gearing means for a property investor

Gearing simply means borrowing to invest. The result each year depends on how rental income compares with deductible expenses:

• Positively geared: rent exceeds expenses, and the net rental income is added to taxable income.
• Neutrally geared: rent and expenses are roughly equal.
• Negatively geared: expenses exceed rent, producing a net rental loss.

A negatively geared investor is relying on capital growth to produce an overall return. The tax treatment reduces the annual loss. It does not remove it. Rental income and yield can be estimated with the rental yield calculator before any tax effect is considered.

How negative gearing rules change from 1 July 2027

The 2026-27 Budget announced that negative gearing of residential property will be limited to new builds. The Treasurer stated in August 2026 that the core legislation passed the Parliament in June 2026, and that a further tranche of detail was open for consultation until 21 August 2026, so some details may still change. According to the Budget fact sheet, as at September 2026 the position is as follows.

Property	Treatment of a rental loss
Established property held, or under contract, before 7:30pm AEST on 12 May 2026	Can continue to be negatively geared in future years until sold
Established property purchased between the announcement and 30 June 2027	May be negatively geared during that period, but not from 1 July 2027
Established property purchased from 1 July 2027	Cannot be negatively geared
New build	Can be negatively geared before and after 1 July 2027

Where the restriction applies, Treasury states that losses will only be deductible against other income from residential properties, including capital gains, and that excess losses can be carried forward to future years. They cannot be deducted against income such as wages. The fact sheet describes new builds as properties that genuinely add to housing supply, such as dwellings built on vacant land. The changes apply to residential property only.

Deductible and non-deductible rental property costs

The size of a rental loss depends on which costs are deductible and when. ATO guidance for residential rental properties sorts expenses into three broad groups.

Costs generally claimed in the year they are incurred

• Interest on the portion of the loan used to buy or improve the rental property
• Council rates, water charges, land tax and strata levies
• Landlord and building insurance
• Property management fees and advertising for tenants
• Repairs and maintenance that fix wear and tear arising while the property is rented

Costs generally claimed over several years

• Borrowing expenses, such as loan establishment fees and lenders mortgage insurance
• The decline in value of eligible depreciating assets
• Capital works, meaning the construction cost of the building and structural improvements

Costs that are generally not deductible

• Repayments of loan principal
• Stamp duty, conveyancing and other purchase costs on a rental property, which ordinarily form part of the cost base for capital gains tax instead
• Travel to inspect a residential rental property, for most individual investors
• Interest on any part of the loan used for private purposes
• Expenses for periods when the property is used privately or is not genuinely available for rent

Initial repairs to fix defects that existed at purchase are usually treated as capital, not as an immediate deduction.

Resident tax rates used in the 2026-27 examples

The Australian Government's tax cuts fact sheet sets out the following resident rates for 2026-27. The Medicare levy of 2 per cent is additional for most taxpayers, so the examples use combined rates of 32, 39 and 47 per cent.

Taxable income	Rate in 2026-27	Rate including 2% Medicare levy
$0 to $18,200	Tax free	Nil
$18,201 to $45,000	15%	17%
$45,001 to $135,000	30%	32%
$135,001 to $190,000	37%	39%
Over $190,000	45%	47%

The same fact sheet states that the 15 per cent rate is legislated to fall to 14 per cent from 1 July 2027.

Worked examples: the same rental loss at three marginal rates

Assume a hypothetical property that remains eligible for negative gearing. It earns $30,000 in rent for the year. The investor pays $32,500 in interest on a $500,000 interest-only loan at an assumed rate of 6.5 per cent, and $7,500 in other cash expenses such as rates, insurance, management fees and repairs. A quantity surveyor's schedule supports a further $6,000 in capital works and depreciation deductions, which involve no cash outlay during the year.

• Cash shortfall before tax: $30,000 less $32,500 less $7,500, a shortfall of $10,000
• Net rental loss for tax purposes: the $10,000 shortfall plus $6,000 of non-cash deductions, a loss of $16,000

Three illustrative investors hold this identical property. Each has a salary that keeps the full $16,000 loss within a single tax bracket.

Item	Investor A	Investor B	Investor C
Salary	$100,000	$170,000	$250,000
Taxable income after the rental loss	$84,000	$154,000	$234,000
Marginal rate including Medicare levy	32%	39%	47%
Tax saving on the $16,000 loss	$5,120	$6,240	$7,520
Cash shortfall before tax	$10,000	$10,000	$10,000
Cash cost after tax	$4,880	$3,760	$2,480

Three points follow. First, every investor is still out of pocket after tax. Second, the identical property costs Investor A almost twice as much to hold as Investor C, which is why the benefit of negative gearing is often described as rising with income. Third, if the same property were an established dwelling caught by the post 1 July 2027 restriction, none of the investors could offset the loss against salary. Each would bear the full $10,000 cash shortfall in that year, with the $16,000 loss carried forward against future residential property income or gains.

The tax saving normally arrives after the return is lodged, while the shortfall is paid monthly. The investment property calculator can model different rents, rates and expenses, and the mortgage repayment calculator shows how the interest bill moves with the rate.

Depreciation and capital works in general terms

Two non-cash deductions often enlarge a rental loss on paper without changing cash flow. Capital works deductions spread the construction cost of the building and structural improvements over a long period set by the tax law. Decline in value deductions cover depreciating assets such as carpets, blinds and appliances over their effective lives.

ATO guidance restricts deductions for second-hand depreciating assets in residential rental properties for most individual investors, so the assets in an established dwelling acquired with the property generally cannot be depreciated by the new owner, while new assets the investor buys generally can. Newer buildings therefore tend to produce larger non-cash deductions than older ones.

These deductions are not free. Capital works deductions claimed generally reduce the property's cost base, which increases the capital gain when the property is sold. The deduction is better understood as a deferral than as a permanent saving.

Capital gains tax when the property is sold

Negative gearing only produces an overall profit if capital growth exceeds the accumulated after-tax losses and the tax payable on sale. In broad terms, the capital gain is the sale proceeds less the cost base, which includes the purchase price and costs such as stamp duty and legal fees. As a simple hypothetical, a property bought for $700,000 and sold for $900,000 shows a gain of $200,000 before costs. If $40,000 of capital works deductions had been claimed, the cost base would generally fall to $660,000 and the gain would rise to $240,000.

Under current rules, individuals who hold an asset for at least 12 months can generally reduce the gain by the 50 per cent discount. Treasury states that from 1 July 2027 the discount will be replaced with cost base indexation for inflation and a 30 per cent minimum tax rate on capital gains. For assets owned before that date and sold after it, the fact sheet states that the 50 per cent discount will apply to the gain up to the asset's value at 1 July 2027, with the new arrangements applying to gains accruing afterwards. Investors in new builds will be able to choose either method. The main residence exemption is unchanged.

Risks of relying on a tax loss

• A loss is still a loss. In the example, Investor A loses $4,880 in cash after tax every year the figures hold. The strategy depends entirely on capital growth, which is not assured.
• Interest rate rises widen the gap. A one percentage point rise on a $500,000 interest-only loan adds $5,000 a year to the shortfall before tax. The interest rates section explains how rates are set.
• The benefit depends on income. Redundancy, parental leave or retirement lowers the marginal rate and the value of the deduction at the moment cash flow is already under pressure.
• Legislative change. The 2026-27 Budget measures show that tax settings can change during a holding period.
• Lenders may not count the tax benefit. APRA's guidance on residential mortgage lending states that good practice is for a lender to place no reliance on a borrower's potential future tax benefits from a loss-making rental property, and that a prudent lender discounts expected rental income by at least 20 per cent. The borrowing power calculator gives a general indication of capacity.

What to check before proceeding

1. Confirm whether the property is an eligible new build or is covered by the 12 May 2026 exemption.
2. Prepare a cash flow budget that works without the tax refund, and test it at a higher interest rate and with several weeks of vacancy.
3. Estimate the capital gains tax position on a realistic sale price, not only the annual deduction.
4. Seek advice from a registered tax agent and, for the loan structure, a licensed credit adviser.

The investment property section and the BorrowWise blog have related guides, and a free assessment is available to discuss general lending options.