How Negative Gearing Works in Australia: The Real Maths Behind the Tax Strategy (2026)

Negative gearing is one of the most talked-about — and most misunderstood — tax strategies in Australia. It lets property and share investors deduct investment losses against their salary or wages, reducing their taxable income today in the hope of a larger capital gain later. This guide explains how negative gearing actually works, when it makes financial sense, when it doesn't, and how the numbers play out at different income levels with real 2025–26 tax rates.

What Is Negative Gearing?

An investment is "negatively geared" when the costs of holding it exceed the income it produces. For a rental property, that means your mortgage interest, council rates, insurance, repairs, depreciation, and management fees add up to more than the rent you collect. For shares, it means the interest on money borrowed to invest exceeds the dividends you receive.

The key feature of Australian tax law is that this shortfall — the net rental or investment loss — can be deducted against your other income, including salary, wages, and business income. If you earn $120,000 and your investment property produces a $15,000 net loss, your taxable income drops to $105,000. At the 37% marginal rate (plus 2% Medicare Levy), that saves you $5,850 in tax.

The strategy is built on a bet: that the asset will grow in value by more than the annual losses, and when you eventually sell, the capital gain — taxed at a discounted rate if held over 12 months — will more than make up for the years of cashflow pain.

How Negative Gearing Works: A Worked Example

Let's walk through a concrete property investment scenario using 2025–26 numbers.

The setup

Annual costs

The tax benefit

But here's the part many property spruikers leave out. Your actual out-of-pocket cash loss — ignoring depreciation, which is a non-cash deduction — is $19,902 minus $6,500 depreciation = $13,402 in real cash you've spent beyond the rent received. After the $7,762 tax refund, your net cash cost for the year is approximately $5,640.

That $5,640 is what it actually costs you to hold this property per year. The question is whether the property will grow in value by more than $5,640 per year — and whether you could have done better investing that money elsewhere.

How Tax Savings Change by Income Level

Negative gearing benefits higher-income earners more because the tax deduction is worth more at a higher marginal rate. Here's the same $19,902 rental loss at different income levels using 2025–26 rates:

The person on $50,000 gets a $3,582 tax break and still pays $9,820 out of pocket. The person on $190,000+ gets $9,354 back and pays only $4,048 per year to hold the same property. Negative gearing is structurally more beneficial at higher marginal tax rates — which is why it's often criticised as regressive.

The Capital Gains Payoff (or Not)

The whole strategy hinges on selling the property at a profit. But the gain is not tax-free — it's taxed at your marginal rate, albeit with the 50% CGT discount if held for more than 12 months.

Worked example: selling after 10 years

Assume the $650,000 property grows at 5% per year for 10 years:

Total profit after 10 years

That looks reasonable — but it assumes 5% annual growth, no major repairs, no vacancy, and no interest rate increases. Change any of those assumptions and the numbers shift dramatically.

What Happens If Growth Disappoints

Property growth is not guaranteed. Here's how the 10-year outcome changes at different growth rates:

At 1% growth — which has happened to many regional and apartment markets over the past decade — you lose money despite 10 years of tax deductions. The tax benefit softens the blow but doesn't prevent the loss. Negative gearing only works when the asset actually grows in value.

Negative Gearing vs Positive Gearing

An investment is positively geared when the income exceeds the costs — meaning it puts money in your pocket every year. A positively geared property produces taxable rental profit (more tax to pay now), but no annual cash drain.

Many experienced investors deliberately seek positively geared or neutrally geared properties — especially as they accumulate multiple investments. Holding three negatively geared properties means three annual cash drains that all need to be funded from your salary.

Negative Gearing With Shares

Negative gearing isn't limited to property. If you borrow money to invest in shares or ETFs (a "margin loan" or loan against your home equity), the interest is tax-deductible. If the interest exceeds your dividends, the loss is deductible against your other income — the same principle as property.

Example: borrowing $200,000 to invest in an ASX 200 ETF

With shares, you also receive franking credits on Australian dividends, which further reduce the tax impact. And unlike property, you don't pay council rates, insurance, or management fees. But the risk is different — share prices are more volatile in the short term, and margin loans can trigger "margin calls" that force you to sell at the worst time.

Depreciation: The Non-Cash Deduction That Changes Everything

Depreciation is often the biggest hidden factor in negative gearing calculations. For property, you can claim:

• Building allowance (Division 43): 2.5% per year of the original construction cost for properties built after 15 September 1987. On a property with $300,000 in construction costs, that's $7,500 per year.
• Plant and equipment (Division 40): Items like carpets, blinds, hot water systems, and air conditioners can be depreciated based on their effective life. A new air conditioner worth $3,000 might be depreciated over 10 years.

Depreciation increases your tax loss without costing you any cash. That's why a property can appear to lose $20,000 on paper but only cost you $13,000 in real cash — the other $7,000 is depreciation. A quantity surveyor's depreciation schedule (costing $600–$800 and fully tax-deductible) is essential for any investment property.

The Five Biggest Mistakes With Negative Gearing

1. Buying for the tax deduction, not the asset

"It's negatively geared, so the government pays for most of it." Wrong. The government refunds a portion of your loss at your marginal tax rate — you still fund the rest. Paying $1 to get back 39 cents is not a wealth strategy. The asset needs to grow. A bad investment with a tax deduction is still a bad investment.

2. Ignoring the opportunity cost

That $5,640 annual cash cost (plus the $160,000 equity tied up in the deposit) could be invested elsewhere. If you invested $160,000 in a diversified ETF portfolio returning 8% per year, after 10 years you'd have approximately $345,000 — and you wouldn't have the stress of tenants, repairs, and property management.

3. Underestimating vacancy and repairs

A single month of vacancy costs you roughly $2,400 in lost rent (on a $550/week property) while interest, rates, and insurance keep accruing. A hot water system replacement ($2,000–$4,000) or a burst pipe ($5,000+) can wipe out your entire year's tax benefit. Budget 2–4 weeks vacancy per year and 1–1.5% of the property value for maintenance.

4. Not stress-testing for rate rises

If your interest rate rises from 6.5% to 8%, the annual interest cost on a $520,000 loan jumps from $33,800 to $41,600 — an extra $7,800 per year. Your net cash cost nearly doubles. Always model what happens if rates rise 2% from your current rate.

5. Forgetting that you pay CGT when you sell

Many investors focus on the annual tax refund and forget the capital gains tax bill at the end. In our $120,000-income example, selling after a $379,000 gain triggers approximately $73,905 in CGT. That bill is often larger than the cumulative tax refunds received during the holding period.

When Negative Gearing Can Make Sense

Negative gearing is not inherently good or bad — it's a tool. It tends to work best when:

• You're on a high marginal tax rate (37%+ including Medicare) and the tax refund meaningfully reduces the holding cost
• You've bought in a location with genuine, long-term growth drivers (population growth, infrastructure, supply constraints)
• You have stable employment and can comfortably fund the annual cash shortfall without financial stress
• You have an adequate emergency fund and no high-interest personal debt
• You intend to hold the property for at least 7–10 years to ride out market cycles
• You've obtained a proper depreciation schedule to maximise non-cash deductions

When It Probably Doesn't Make Sense

• You're on a low marginal tax rate — the tax refund is small relative to the cash loss
• You don't have an emergency fund and the holding costs would put you under financial pressure
• You haven't paid off high-interest debt (credit cards, personal loans, car finance)
• You're buying in a market with oversupply or flat growth prospects (inner-city apartments in some capital cities have delivered near-zero growth over the past decade)
• You don't have stable income — if you lose your job, you still need to service the investment loan
• You're buying primarily because a property spruiker told you it's "tax-effective"

How Negative Gearing Affects Your Home Loan Borrowing Power

Banks assess your serviceability including any investment property costs. A negatively geared property reduces your borrowing capacity for future loans because:

• The full interest cost of the investment loan is included in your expenses
• Only 80% of the rental income is counted as income (banks apply a 20% vacancy/cost haircut)
• The net shortfall reduces your surplus and therefore your capacity to service additional debt

If you're planning to buy your own home in the next few years, purchasing a negatively geared investment property first can significantly reduce how much you can borrow for your primary residence. Run the numbers with a broker before committing.

Record-Keeping Requirements

The ATO closely scrutinises rental deductions. To claim negative gearing properly, you need to keep:

• Records of all rental income received (statements from your property manager or bank records)
• Receipts for every deductible expense — interest statements, rates notices, insurance premiums, repair invoices
• A depreciation schedule prepared by a qualified quantity surveyor
• Evidence of how the property was used throughout the year (fully rented, periods of vacancy, any personal use)
• Loan statements showing the purpose of the borrowing (the loan must be directly used to purchase the investment — you can't deduct interest on a loan that was used for personal expenses)

Keep all records for five years after you lodge the relevant tax return.

The Bottom Line

Negative gearing is not a wealth strategy in itself — it's a tax treatment of an investment loss. The strategy only works when the underlying asset grows by more than enough to cover the cumulative losses, the eventual CGT bill, and the opportunity cost of tying up your capital.

Before committing to a negatively geared investment, model the full picture: annual cash cost after tax, what happens if rates rise, what happens if growth disappoints, and whether your money would work harder in super or a diversified portfolio. The tax deduction is real, but it's not free money — it's a discount on a loss.

If you can afford the holding costs, you've chosen a genuine growth asset, and you have a long time horizon, negative gearing can be a legitimate part of a wealth-building strategy. Just make sure you're buying the right asset, not chasing a tax refund.