What Is Negative Gearing and How Does It Work for Australian Property Investors?
Negative gearing is when a rental property's costs exceed its income. How the loss is treated under current law, and what changes from 2027-28.
What is negative gearing?
Negative gearing is what happens when the costs of holding a rental property add up to more, in a year, than the rent it brings in. The Australian Taxation Office defines it plainly: negative gearing “occurs when you buy a rental property with the assistance of borrowed funds and the rental income is less than the deductible expenses (including interest on the borrowings).” The result, in the ATO’s own words, is that “the tax result of negatively gearing a property is that a net rental loss arises.”
In plain terms: you’ve borrowed to buy a rental property, the loan interest and other running costs add up to more than the rent you collect, and that shortfall becomes a loss for tax purposes — even if the property might still be part of a longer-term plan. Negative gearing isn’t a product, a scheme, or something you apply for. It’s simply the label for this common cash-flow position — the mirror image of a cash flow positive property, where rent covers costs with room to spare. Our guide to cash flow positive vs negatively geared property walks through that comparison in more detail.
How is the loss treated under current law?
As at July 2026, for the 2026-27 income year, a net rental loss isn’t quarantined. The ATO’s guidance says investors “may be able to claim a deduction for the full amount of rental expenses against your rental and other income (such as salary, wages or business income)” when they lodge a tax return. Where the rest of a person’s income for the year isn’t enough to absorb the loss, “you can carry it forward to the next income year.”
That offsetting is the mechanism people usually mean when they talk about negative gearing “reducing tax”: the loss is set against other taxable income, which can lower the tax payable for that year. There’s no general dollar cap on this under current law, and no rule confining the loss to being used only against rental income — as things stand, it can also be set against salary or business income.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
What costs make up the loss?
“Deductible expenses” usually means several things stacked together, not just the loan:
- Loan interest — typically the single largest cost in a negatively geared property.
- Depreciation, which splits into two different regimes. Division 43 covers the building structure itself (“capital works”): 2.5% a year over 40 years for residential construction that began on or after 16 September 1987, apportioned to the days the property was earning income. Division 40 covers separate plant and equipment — ovens, carpets, air conditioners and similar items — but a second-hand asset restriction introduced in 2017 generally blocks this deduction for plant and equipment that was already installed when an established property was bought, with limited exceptions for new dwellings and a small number of excluded investor types (self-managed super funds are not among the exceptions).
- Property management fees — the Real Estate Institute of Queensland puts typical property management fees, nationally, at roughly 5–12% of weekly rent, though the exact figure varies by state and this is industry commentary, not a government statistic.
- Council rates, insurance, repairs and land tax — the other ordinary costs of holding a property. Land tax in particular is set state by state, with its own threshold, scale and exemptions in each jurisdiction — check your own state or territory revenue office for the figures that apply to you, rather than assuming one state’s settings carry across.
None of these expenses are automatically deductible in full. Apportionment rules reduce what can be claimed where a property is used privately or rented below market rate, and the depreciation restriction above narrows what counts before the loss is even calculated.
Is negative gearing changing? Current law vs the 2027-28 reform
Everything above describes what applies now. A separate, already-enacted change narrows it from the 2027-28 income year — a genuine law change, not a proposal, but one that as at July 2026 has not yet taken effect.
Under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49 of 2026, royal assent 26 June 2026), a new provision — section 26-155 of the Income Tax Assessment Act 1997 — will quarantine net residential rental losses starting in the 2027-28 income year. From that year, the loss will no longer be deductible against other income such as salary. Instead, it will only be usable against residential capital gains, or carried forward against future residential rental income.
| Current law (2026-27 income year) | From the 2027-28 income year (enacted) | |
|---|---|---|
| Net rental loss can offset | Rental income and other income (salary, business income) | Residential capital gains and future residential rental income only |
| Unused loss | Carried forward if other income is insufficient | Carried forward against future residential rental income |
| General dollar cap | None | None — the quarantine applies regardless of amount |
A few details matter for anyone tracking this change:
- Grandfathering: interests acquired before 7:30pm AEST on 12 May 2026 (from the date the contract was entered into) keep the current treatment rather than the quarantine.
- Exemptions: widely held unit trusts and complying superannuation funds sit outside the quarantine.
- New residential dwellings: the Act carves out an exemption for new builds, but the precise definition depends on a ministerial legislative instrument that had not been made as at July 2026. What counts as a “new build” for this purpose isn’t settled yet, so this article doesn’t attempt to define it — treat any claim about that boundary as unconfirmed until the instrument is registered.
This quarantine is a separate mechanism from the 1 July 2027 capital gains tax changes that come from the same Act — the two shouldn’t be read as one and the same reform, even though they share a start date and a piece of legislation.
Tax outcomes depend on your circumstances — speak with a registered tax agent before acting.
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Is negative gearing a strategy I should use?
There’s no single yes-or-no answer to that — it depends on factors specific to your own situation, including:
- Cash flow tolerance — can you comfortably cover the gap between rent and costs each month, on top of everything else you owe?
- Reliance on the property’s own performance — negative gearing works alongside the property, not instead of it; it doesn’t change what the property itself does.
- Your marginal tax rate — the value of offsetting other income depends on your own tax position, which is personal and can change from year to year.
- Time horizon — how long you plan to hold the property affects how the loss, and later any capital gain, plays out.
Our guide to capital growth vs rental yield for a first investment property covers a related trade-off: how much weight to put on growth versus income when choosing a property in the first place. For how negative gearing fits into the wider picture of investing in property, see our guide to property investment in Australia.
Because this decision touches your personal tax position, a registered tax agent is best placed to work through the numbers for your circumstances, and a licensed financial adviser can help weigh it against your broader goals.
