What is negative gearing?

Negative gearing means your rental property makes a loss for tax purposes. An eligible loss can reduce your tax, but you still need to cover the property's bills and loan repayments.

In the 2026-27 example below, a $17,600 annual shortfall produces a potential $5,632 reduction in income tax and Medicare levy. The investor still pays $11,968 from their own pocket. Start with that remaining cost when deciding whether a property fits your budget.

A rental property is negatively geared when you borrow to buy it and its deductible expenses exceed its rental income. In the 2026-27 financial year, an eligible individual can generally offset that net rental loss against other assessable income, such as wages. Your ownership structure and deductions affect the result.

The ATO's rental property guide explains this current treatment. From 1 July 2027, established properties acquired at or after 7:30 pm AEST on 12 May 2026 are generally subject to new rental-loss limits. The detailed reform section below explains the exceptions and why the purchase date and property type matter.

Tax profit and cash flow are different calculations. Principal repayments take money from your account but are not a rental deduction. Eligible depreciation can reduce taxable income without a matching cash payment that year. A property can therefore be positive on one measure and negative on the other.

Sandra is a hypothetical investor, not a Hunter Galloway client story. She owns a $700,000 property with a $560,000 loan. This example covers 2026-27 and assumes the rental loss is fully deductible against her other income.

Her loan is interest only at a constant 6% for the full year. That is an example rate, not a current offer or a recommendation. The property earns $28,000 rent and has $12,000 of other cash expenses, all assumed deductible that year. There is no private use, vacancy, depreciation or change in the loan balance.

Sandra needs about $1,467 a month to cover that shortfall before the tax benefit arrives. The purchase deposit, stamp duty, legal fees and future capital spending sit outside this holding-cost example.

Assume Sandra's taxable income before the rental loss is $90,000, after any other deductions. The loss reduces it to $72,400. Both amounts are within the 30% marginal bracket under the 2026-27 resident tax rates.

That leaves about $997 a month after tax. Sandra gets back 32 cents for each dollar of deductible loss in this example and pays the remaining 68 cents herself.

The Medicare calculation assumes she pays the full 2% levy before and after the deduction. We have excluded the Medicare levy surcharge, HELP repayments, tax offsets and other income tests. Your tax saving can differ, particularly if a deduction crosses a tax bracket or you qualify for a levy reduction or exemption.

A reduction in tax payable does not guarantee a refund of the same amount. The amount already withheld and the rest of your tax return affect whether you receive a refund or have a bill. An approved PAYG withholding variation may bring some benefit into your pay during the year; it does not increase the total deduction.

Add the principal component to your cash budget. It reduces your debt but does not create another tax deduction. Use your lender's actual repayment schedule to split principal and interest, because the interest amount changes as the balance falls.

This is why an interest-only example should never be treated as the total repayment on a principal and interest loan. Compare the required repayments with our mortgage calculator before relying on the monthly figure.

Suppose her accountant confirms an additional $4,000 deduction for eligible capital works or depreciating assets, without an extra cash payment in that year. Her tax loss becomes $21,600, while the cash shortfall remains $17,600.

At the same assumed combined 32% rate, the potential tax reduction becomes $6,912. The remaining annual cash cost is $10,688. This is a separate example, not an assumed entitlement for the property.

Now hold the loan, rent and expenses above constant for the full 2027-28 financial year. Assume both investors have $90,000 taxable income before any rental loss, the full 2% Medicare levy, and no other residential income or capital gains against which a restricted loss could be used.

Sandra entered her purchase contract before 7:30 pm AEST on 12 May 2026 and remains the owner. The second hypothetical investor entered a contract for an established dwelling in September 2026 and has no exemption.

The second investor needs about $469 more a month after tax, based on the unrounded annual amounts. The $17,600 restricted loss is carried forward under the reform rules; it is not an immediate deduction against salary. The 30% marginal bracket still applies to both taxable-income figures in 2027-28. Other taxes, offsets and income tests are excluded, as in the first example.

A qualifying new dwelling can retain the loss deduction, but eligibility must be established separately. This comparison starts in July 2027: buying an established property in September 2026 does not remove the ordinary rental-loss deduction for the 2026-27 year.

The core reform is law. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June 2026. Its negative gearing limits apply from the 2027-28 income year.

For an ordinary individual investor, the main distinction is:

For a purchase under contract, the law uses when you entered the contract for this grandfathering test. It is not simply the settlement date. Restricted losses can be carried forward, and rules govern their use against residential income and capital gains.

Ask your tax adviser to check the contract, ownership history and new-dwelling eligibility before putting a future tax saving into your budget. Buying an established property before July 2027 does not, by itself, preserve the old treatment.

Some transfers have specific exceptions. The Tax Reform No. 2 Act 2026, assented to on 26 August 2026, adds rules for certain inheritances, surviving co-owners and relationship breakdowns. Those amendments commence on 1 October 2026 and apply from 2027-28. Ask your tax adviser to check the actual transfer; inheritance alone does not establish eligibility.

The federal test is about adding housing supply. A state first home owner grant, stamp duty concession or a builder's description of a property as "new" does not decide its federal tax status.

Treasury's Budget examples explain the intended distinction:

The detailed definition remains an area to check before buying. Treasury's August draft explanation proposes a 24-month acquisition window measured from the first certificate of occupancy, replacing the earlier Budget's 12-month approach. The final definition is to be included in primary legislation; the draft window is not a confirmed entitlement.

The draft explanatory material also explains why separate ownership matters for granny flats. A flat without its own title generally follows the main dwelling's status in the draft, rather than qualifying independently. Get the contract, occupancy certificate and title checked together.

Capital gains tax rules are also changing. A rental deduction and the tax payable when you eventually sell are separate issues, so have both included in your accountant's assessment.

Your tax return needs the deductible amount, not simply the total that left your bank account. Keep invoices and loan records so your accountant can separate running costs, capital spending and private expenses.

Interest must relate to borrowing used to earn assessable income. The ATO's rental interest guidance makes clear that principal repayments are not deductible.

Using your rental property as security does not make every loan deductible. If you redraw money for a private car or your own home, the interest on that private portion generally cannot be claimed. Mixed borrowing requires ongoing apportionment and records, including after refinancing.

If you might rent out your current home later, discuss the difference between offset and redraw with your broker and accountant before moving money.

Some costs may be deductible for the period the property is rented or genuinely available for rent. Examples include agent fees, insurance, rates and eligible repairs. Private use or renting only part of the property can limit the claim.

Repairing wear caused during the rental period can be different from fixing defects that existed when you bought the property. Initial repairs, improvements and replacement of an entire asset are generally capital expenses. The ATO rental guide explains why the timing and nature of the work matter.

A new kitchen can contain several types of expenditure. Ask for itemised invoices rather than claiming the whole renovation as a repair. Qualifying building work may attract capital works deductions over time; equipment can fall under separate depreciation rules.

You cannot assume all used appliances and fittings qualify. The ATO's depreciation guide sets out restrictions on certain second-hand assets in residential rentals.

Eligible borrowing expenses over $100 are generally spread over 5 years or the loan term, whichever is shorter. Amounts of $100 or less can generally be claimed in the year incurred. A partial first year and private borrowing change the calculation. See the ATO borrowing expenses guide.

Purchase costs such as stamp duty on the property are not ordinary annual rental deductions. Some costs may form part of the cost base used when working out a capital gain. Capital works deductions you have claimed or can claim generally require a cost-base adjustment, subject to exceptions. The ATO explains those adjustments here.

The main drawback is the ongoing loss you have to fund. A tax saving can reduce the cost of holding an investment. It cannot make rent arrive on time, cover an urgent repair today or guarantee that the property will rise in value.

Before committing, write down the cash you could contribute each month while still paying your own household bills. Then test the property's budget when rent stops for a period, insurance or strata costs increase, and the loan rate rises.

For Sandra's example, a rise from 6% to 7% on a constant $560,000 interest-only balance adds $5,600 a year before tax. That is about $467 a month more to fund. Any tax relief depends on her eligibility and when it is received.

If you are buying an established investment now, prepare a separate budget for the rules that apply from July 2027. Include the possibility that no rental-loss deduction against wages is available. Property growth is uncertain, while the repayment has a due date.

A bank's borrowing limit also does not tell you what will feel comfortable. For an investment home loan, we can compare loan costs, repayments and lender assessment of your income. Your accountant should confirm the tax result and ownership structure. Bring those calculations together before deciding on a purchase price.

The wider concern is that tax concessions can encourage people to borrow more to invest in housing. In its 2015 home ownership submission, the Reserve Bank said the interaction of negative gearing and other tax rules could encourage this behaviour.

The RBA also recognised the principle of deducting legitimate investment expenses. It noted that tenants could benefit if landlords accepted lower rental yields. Those are competing policy considerations, rather than proof that every negatively geared property is a good investment or that one tax rule determines rents.

Negative gearing existed before the changes often associated with the 1980s. In 1985, the government restricted the use of rental interest costs against other income. That restriction was removed in 1987, restoring the earlier treatment. The Reserve Bank's historical account records both changes.

The next major change covered in this guide was legislated in 2026. The new rental-loss restrictions apply from 2027-28, with different treatment for grandfathered properties and qualifying new dwellings. The reform section sets out the dates and exceptions that matter for a purchase now.