Quick answer: Negative gearing means your rental property costs you more than it earns, and Australia’s tax system lets you subtract that loss from your other income — your salary, for example — so you pay less tax. On a $120,000 salary, a $12,000 rental loss cuts your total tax bill (income tax plus Medicare levy) by $3,840. That’s the whole mechanism, and the thing most people get wrong: you still lost $12,000. The tax system hands back $3,840 of it. You’re $8,160 out of pocket.
And there’s a bigger story: negative gearing has an expiry date for established homes. Legislation passed on 26 June 2026 quarantines rental losses from 1 July 2027 — losses on established homes bought after Budget night (7:30pm AEST, 12 May 2026) will no longer offset your salary. The 2026-27 year is the last full year under the old rules. This guide covers how it works today, the maths at 2026-27 rates, what changes on 1 July 2027, and how annual losses interact with capital gains tax when you sell — the part most guides gloss over.
Negative vs positive vs neutral gearing
“Gearing” just means borrowing to invest. The sign in front describes the property’s cash flow:
- Negatively geared: deductible costs exceed rental income. The net rental loss is subtracted from your other income, reducing your tax.
- Positively geared: rent exceeds costs. The surplus is profit and it’s taxed at your marginal rate like any other income.
- Neutrally geared: rent roughly equals costs. The property washes its face before tax.
There’s a nuance inside “negative” that matters. A property can be cash-negative — the rent doesn’t cover your outgoings, so money leaves your bank account every month — or merely tax-negative, where your return shows a loss because non-cash depreciation pushes total deductions above rent even though the rent covers every bill. A new build with a strong depreciation schedule can be tax-negative while the rent pays for everything. An older apartment at current interest rates is usually cash-negative by a wide margin, with the refund covering only about a third of the shortfall.
How the tax maths actually works (2026-27 figures)
Meet Priya: $120,000 salary, an established unit bought in 2024 (so the 2027 reform never touches her). Her year at 2026-27 rates:
| Item | Amount |
|---|---|
| Rent ($550/week × 52) | +$28,600 |
| Loan interest (interest-only, $500k at 6%) | −$30,000 |
| Rates, insurance, management (7%), repairs | −$5,200 |
| Capital works depreciation (Div 43) | −$4,500 |
| Plant & equipment depreciation (Div 40) | −$900 |
| Net rental loss | −$12,000 |
Her taxable income falls from $120,000 to $108,000. At 2026-27 rates ($4,020 plus 30c per dollar over $45,000):
- Income tax without the property: $4,020 + 30% × $75,000 = $26,520
- Income tax with the $12,000 loss: $4,020 + 30% × $63,000 = $22,920
- Income tax saved: $3,600 (exactly 30% × $12,000)
- Medicare levy saved: 2% × $120,000 ($2,400) vs 2% × $108,000 ($2,160) = $240
- Total tax saved: $3,840 — the loss multiplied by her marginal rate plus the levy (30% + 2%)
Now the part that matters: her cash shortfall is $6,600 (cash costs $35,200 minus rent $28,600). The $3,840 tax saving doesn’t cover it — she’s still $2,760 out of pocket for the year, about $53 a week. Negative gearing softened the loss; it didn’t erase it. Run your own salary and loss through our income tax calculator (full 2026-27 rates in our income tax rates guide).
The same arithmetic at every bracket (2026-27 resident rates, Medicare levy where it applies):
| Taxable income | Marginal rate + levy | Tax saved per $10k rental loss |
|---|---|---|
| $18,201 – $45,000 | 15% + 2%* | $1,700 |
| $45,001 – $135,000 | 30% + 2% | $3,200 |
| $135,001 – $190,000 | 37% + 2% | $3,900 |
| $190,001 and over | 45% + 2% | $4,700 |
*The 2% Medicare levy only applies above the low-income thresholds. The same $10,000 loss is worth $4,700 at $200,000 and $1,700 at $40,000 — the strategy favours high earners. Over half of Australia’s landlords reported a net rental loss in 2023-24 (ATO Taxation Statistics).
What the ATO lets you deduct — and what it doesn’t
Negative gearing isn’t a special scheme with its own application form. It’s the ordinary deduction rules at work: rent is assessable income, and the costs of earning it are deductible. When deductions exceed rent, the excess reduces your other income.
| Deductible now | Deductible over years | Never deductible |
|---|---|---|
| Loan interest (interest only — not principal) | Capital works (Div 43): 2.5%/yr over 40 years for residential construction commenced after 15 Sept 1987; structural improvements after 27 Feb 1992 | Principal repayments |
| Council rates, water rates, land tax | Plant & equipment (Div 40): each asset depreciated over its ATO effective life | Interest on the part of a loan used for private purposes |
| Landlord & building insurance | Borrowing costs (loan fees, LMI, broker fees): over 5 years or the loan term, whichever is shorter | Holding costs on vacant land (denied since 1 July 2019) |
| Property management & letting fees | Div 40 depreciation on second-hand inclusions (denied since 1 July 2017) | |
| Repairs & maintenance (fixing, not improving) | Initial repairs — they go to the cost base for CGT instead | |
| Advertising, accounting fees, cleaning, pest control |
The interest rule — and the redraw trap
Interest is deductible only if the borrowed money was used to produce assessable income — the ATO’s “purpose test”. Redraw $40,000 for a holiday and that slice of interest is no longer deductible — and every future interest bill must be apportioned between the two portions, permanently. The fix is structural: separate loan splits for investment and personal use, and never run personal spending through the investment split.
Vacant land and second-hand depreciation
Since 1 July 2019, individuals can’t claim holding costs — including interest — on vacant land, even if they intend to build a rental on it (narrow exceptions: carrying on a business on the land, or the property was destroyed by events beyond your control). And since 1 July 2017, you can’t claim Div 40 depreciation on plant and equipment already in a second-hand residential property when you bought it — only assets you install afterwards qualify. This is why a quantity surveyor’s schedule is near-mandatory for new builds and near-useless for 1970s units.
Our 2026-27 deductions checklist covers the full claim landscape beyond property.
Where it goes on your tax return
In the supplementary section of your individual return, Item 21 (Rent) is the rental property block: label P for gross rent, label Q for interest deductions, label F for capital works (Div 43), label U for everything else. Net rent = P minus (Q + F + U) — and if expenses exceed rent, print L in the Loss box. That net rental loss then reduces your total taxable income for the year.
(Plant and equipment depreciation is claimed through the capital allowances labels rather than Item 21 — myTax and your accountant handle the routing.) If the property will clearly run at a loss, lodge a PAYG withholding variation with the ATO so your employer withholds less tax each payday — the refund arrives across the year instead of as a lump sum after you lodge.
When you sell: how the loss years meet CGT
1. The 50% CGT discount (for now). Hold more than 12 months and half the capital gain is excluded from your taxable income — in 2026-27, at least. Priya sells her $650,000 unit for $1,000,000: with $30,000 purchase costs, $20,000 sale costs and $50,000 of Div 43 claimed, her cost base is $650,000 and the gain $350,000. The discount leaves $175,000 assessable in the year of sale. Our 50% CGT discount guide has the full rulebook; model your own sale on our CGT calculator.
2. The Div 43 clawback. Every dollar of capital works deductions claimed reduces the cost base, increasing the eventual gain by the same amount. The ATO is explicit — claimed (or claimable) capital works deductions come off the cost base. Under the 50% discount, roughly half that clawback is then discounted away: Div 43 is a deferral, not free money.
3. The 2027 change to the discount itself. From 1 July 2027, the 50% discount is replaced by cost-base indexation plus a 30% minimum tax rate on gains accruing after that date (individuals and trusts; new builds keep the 50% discount). Gains accruing to 30 June 2027 keep the old discount — anyone modelling a long hold must price the sale under the new regime, not the old one.
The 2027 reform: what’s actually law
Let’s pin this down, because most guides hedge. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 — it is law, and the ATO confirms both measures apply from 1 July 2027:
- Negative gearing quarantined for established dwellings. For an established home bought after 7:30pm AEST on 12 May 2026, net rental losses can’t offset salary, wages or business income from 1 July 2027. Losses are quarantined: usable against residential property income and capital gains, with any excess carried forward indefinitely.
- Grandfathered: everything held at the cut-off. Owned the property — or under contract — at 7:30pm AEST on 12 May 2026? The old rules apply until you sell: no cap on dwellings, no phase-out. The cut-off turns on contract date, not settlement.
- New builds are exempt. Dwellings that genuinely add to housing supply — built on vacant land, off-the-plan apartments, knock-down rebuilds that add dwellings — keep full negative gearing and the 50% CGT discount, whenever acquired.
- Untouched: commercial property, shares and other non-residential investments, widely held trusts, and complying super funds (including SMSFs).
2026-27 is the last full year of the old rules for everyone. An established rental bought in, say, August 2026 gets one final year of full salary offset, then the loss must be absorbed by rental income and gains. If a property only stacks up with the salary offset, it doesn’t stack up after July 2027 — model it pre-tax with our rental yield calculator.
Sources: ATO — Tax reform: boosting home ownership; ATO — Individual tax return instructions 2026, Item 21 Rent
Common mistakes investors make
- Expecting the loss back dollar for dollar. The refund is the loss multiplied by your marginal rate — 32 cents in the dollar for Priya, 47 cents at the very top. A $12,000 loss never returns $12,000.
- Thinking the reform has already started. It hasn’t — 2026-27 runs entirely under the old rules. Both changes begin 1 July 2027.
- Contaminating the loan. One redraw for private spending permanently splits the loan’s deductibility. Set up separate splits on day one and keep personal money out of the investment facility.
- Assuming the loss cuts HELP/HECS repayments. It doesn’t — the ATO adds back your total net investment loss when calculating HELP repayment income. Priya’s $12,000 loss cuts her taxable income to $108,000, but her HELP repayment income stays at $120,000, costing her an extra $1,800 in compulsory repayment at 2026-27 rates. Source: ATO — study and training loan repayment thresholds and rates.
- Claiming depreciation on the previous owner’s appliances. Since 1 July 2017, Div 40 on second-hand residential plant and equipment is dead. On an established purchase, your depreciation story is Div 43 on the building plus anything you install.
Tips: getting the most out of the rules while they last
- Get a depreciation schedule on new builds. A quantity surveyor’s report ($600–$1,000, itself deductible) documents every Div 43 and Div 40 component — on a new build it can mean thousands you’d otherwise miss; on a 1970s unit, save your money.
- Model post-July-2027 purchases pre-tax. For established property bought after the cut-off, the salary offset has 12 months left. If the deal needs it to survive, walk away — or buy a new build, where the concession continues.
- Keep the loan structure clean. Separate splits, no personal redraws from the investment facility.
- Get a valuation when converting your home to a rental. The CGT cost base becomes the market value on the day it’s first rented — cheap to obtain now, expensive to reconstruct later.
FAQ: the questions readers actually ask
Is negative gearing being abolished in Australia?
No — it’s being restricted. From 1 July 2027, losses on established dwellings bought after 7:30pm AEST on 12 May 2026 can only offset residential property income and capital gains, with the excess carried forward. Pre-cut-off holdings keep the salary offset until sold; new builds keep it indefinitely.
Do I get my rental loss back dollar for dollar at tax time?
Never. Your saving is the loss times your marginal rate plus the 2% Medicare levy — 32 cents in the dollar at $120,000, 47 cents at the top. A $12,000 loss at $120,000 returns $3,840 and leaves $8,160 gone.
Does a rental loss reduce my HELP/HECS repayment?
No — this surprises almost everyone. The ATO calculates HELP repayment income by adding back your total net investment loss (including net rental losses) to your taxable income. Your rental loss lowers your income tax but leaves your compulsory HELP repayment untouched.
Can I negative gear my own home?
No. Deductions require the property to genuinely produce (or be available to produce) rental income. If you later move out and rent it, it can become negatively geared from that point, and its CGT cost base resets to the market value on the day it’s first rented — get that valuation in writing.
Can I negative gear shares or a commercial property?
Yes, and the 2027 reform doesn’t touch them. Interest on money borrowed to buy income-producing shares or a commercial property remains deductible against your other income — the quarantine applies only to residential dwellings.
I bought an established rental after 12 May 2026. What actually changes for me?
For 2026-27: nothing — full salary offset. From 1 July 2027 your losses are quarantined: usable against rental income or the capital gain on sale, carried forward if unused, but no longer reducing tax on your wages. The rules apply property by property.
The bottom line
Negative gearing is simple and widely misunderstood: a rental loss reduces your taxable income, returning a fraction of the loss at your marginal rate — never the loss itself. For 2026-27 the machinery works as it has for decades: Item 21 on your return, interest at label Q, capital works at label F, the L in the loss box.
What changes is the horizon. From 1 July 2027, established homes bought after Budget night lose the salary offset, while pre-cut-off holdings and new builds carry on. And whenever you sell, the Div 43 deductions you claimed come back through a reduced cost base — a deferral, not a gift. The investors who’ll do well are the ones who needed the least tax help all along: properties chosen for yield and growth, modelled before tax, with clean loan structures and documented depreciation. That’s always been the right way to buy. From July 2027, it’s the only way that works.
