Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates, producing a net loss that can be offset against your other assessable income to reduce the tax you owe. It is one of the most widely used property investment strategies in Australia, yet it is also one of the most misunderstood. This guide unpacks exactly how it works, what it genuinely costs and saves you, and the real risks every investor should weigh before signing a contract.

How Does Negative Gearing Work in Australia?

At its core, negative gearing is an accounting outcome rather than a deliberate strategy. When your allowable deductions — interest on your investment loan, council rates, property management fees, repairs, depreciation and more — total more than your rental income for the financial year, you record a rental loss. Under current Australian tax law, that loss is deductible against wages, business income or other investment income in the same year.

Consider a straightforward example. A property investor earns $60,000 in salary. They own a rental property that returns $24,000 in annual rent but costs $32,000 per year in interest, depreciation and expenses. The $8,000 shortfall is a deductible loss, reducing taxable income from $60,000 to $52,000. At a marginal rate of 32.5 cents in the dollar (plus Medicare levy), that saves roughly $2,755 in tax. The investor still has an $8,000 cash shortfall to fund from their own pocket, but the after-tax cost is closer to $5,245.

This is the fundamental mechanic. The tax system does not eliminate your loss — it simply shares part of the cost with the ATO in proportion to your marginal tax rate. The higher your marginal rate, the larger the tax saving, which is why negative gearing is most commonly used by investors on incomes above $90,000. For a detailed breakdown of how Australian tax law treats these deductions, see our guide on negative gearing tax in Australia.

What Costs Are Deductible?

• Loan interest (the largest deduction for most investors)
• Property management fees
• Council rates and water charges
• Insurance premiums
• Repairs and maintenance (not capital improvements)
• Depreciation on the building structure and plant and equipment (via a tax depreciation schedule)
• Advertising for tenants, accounting fees and some travel expenses

Capital improvements are not immediately deductible but are added to the property’s cost base, reducing your Capital Gains Tax (CGT) liability when you sell.

What Are the Real Tax Benefits of Negative Gearing?

The tax benefit of negative gearing is directly proportional to your marginal income tax rate. According to the ATO’s 2022-23 individual tax statistics (the most recently published full-year data), more than 1.3 million Australians declared a net rental loss in that year, collectively claiming over $10 billion in rental deductions above rental income received. The average deductible loss per investor was approximately $7,200.

For an investor on the 37% marginal rate (taxable income between $120,001 and $180,000), every $10,000 of rental loss saves $3,700 in tax. For someone on the 45% top rate, the saving reaches $4,500 on the same loss. Conversely, an investor on the 19% rate saves just $1,900 — meaning they fund more of the shortfall from their own pocket.

The second tax lever is the 50% CGT discount. If you hold the property for more than 12 months before selling, only half of any capital gain is included in your taxable income. This is where the long-term financial logic of negative gearing is meant to play out: accept annual cash losses in exchange for a discounted tax rate on a larger lump-sum gain at sale. Our detailed post on negative gearing tax benefits explores how these two concessions interact in practice.

Non-Cash Deductions: The Depreciation Advantage

One benefit many investors overlook is that depreciation is a non-cash deduction. A brand-new property worth $600,000 might carry a building allowance claim of $6,000 to $9,000 per year under Division 43 of the Tax Act, plus additional claims on plant and equipment through a quantity surveyor’s depreciation schedule. This can push a property into negative territory on paper while the investor’s actual cash shortfall is considerably smaller. For existing properties built before July 1987, the building allowance does not apply, which affects the attractiveness of older stock for tax purposes.

What Are the Risks of a Negatively Geared Property?

Negative gearing carries real financial risks that are often underweighted in investor conversations focused purely on tax savings.

Cash Flow Dependency

The most immediate risk is cash flow. A negatively geared investor must fund the annual shortfall from their own income every single year the property runs at a loss. If interest rates rise, vacancy increases or unexpected repairs arise, that shortfall widens. According to Herron Todd White’s March 2026 Month in Review, the RBA has lifted the cash rate twice in early 2026, bringing it to 4.10% — approaching what the RBA itself describes as restrictive territory. For investors who borrowed at variable rates, each 0.25% increase adds roughly $50 per month to repayments on a $250,000 loan balance. On a $700,000 investment loan, two rate rises add over $280 per month to the already negative cash position.

Capital Growth Is Not Guaranteed

The entire investment thesis for negative gearing rests on eventual capital growth exceeding the accumulated losses. Herron Todd White’s March 2026 review notes that national property values continue to rise but that the pace varies widely by city. Perth, Brisbane and Adelaide are maintaining solid monthly gains, while Sydney and Melbourne remain subdued as they approach affordability ceilings. Melbourne is widely tipped to regain momentum later in 2026, but that recovery is not assured. An investor who buys in a stagnating market may accumulate years of cash losses without the capital gain needed to justify the strategy. For a side-by-side comparison of strategies, our analysis of positive vs negative gearing is worth reading before you commit.

Vacancy and Tenant Risk

A vacant property generates zero rental income but full holding costs continue. Even a single month of vacancy on a $2,000-per-month rental property wipes out a significant portion of any annual tax saving. SQM Research’s national residential vacancy rate data shows that vacancy tightened to around 1.0% nationally in late 2025, but conditions are highly localised. Oversupplied apartment markets in some CBD pockets carry materially higher vacancy rates, which disproportionately affects investors in one- and two-bedroom inner-city units.

Policy and Legislative Risk

Perhaps the most significant risk heading into the second half of 2026 is policy uncertainty. Herron Todd White’s March 2026 review flags that the May federal budget may include changes to both the CGT discount and negative gearing arrangements. At the time of writing, it remains unconfirmed whether any changes would be grandfathered for existing investors or applied broadly to all future tax years. APRA has also implemented new debt-to-income caps for investors, making it harder to borrow above six times annual income. Investors considering entering the market now must factor in the possibility that the tax treatment underpinning their financial model could change within the current parliamentary term.

Who Is Negative Gearing Most Suited To?

Negative gearing is not a one-size-fits-all strategy. According to Herron Todd White’s March 2026 review, the investor market is diverging into a more selective, constraint-driven landscape. A record number of younger buyers are choosing to rent where they want to live while purchasing investments in more affordable markets — a strategy sometimes called “rentvesting.” These buyers are often on rising incomes with a long investment horizon, which suits the fundamental logic of negative gearing.

The strategy is generally best suited to investors who:

• Have a marginal tax rate of 32.5% or higher, making the tax offset meaningful
• Have stable, sufficient income to comfortably fund annual cash shortfalls without stress
• Are investing with a minimum seven to ten year horizon to allow capital growth to offset accumulated losses
• Hold adequate cash reserves or accessible equity to absorb interest rate rises, vacancy periods or unexpected repair bills
• Are buying in a market with credible long-term capital growth drivers — population growth, infrastructure investment, employment diversity

Herron Todd White’s March 2026 analysis also notes a strong surge in demand for dual-living configurations — granny flats, duplexes and self-contained studios — as investors pivot from pure capital growth strategies toward properties that can generate stronger cash flow. This reflects a broader market shift: investors are increasingly looking for assets that narrow the negative gearing gap rather than maximise it, reducing their reliance on a tax offset that may itself be reformed.

Apartments vs Houses in 2026

Herron Todd White’s March 2026 review tips apartment price growth to outpace house price growth in several markets for the first time in many years, with investors increasingly targeting established family-friendly units over one- and two-bedroom stock. If this trend materialises, it has meaningful implications for negative gearing investors who historically favoured houses for capital growth. Established apartments in well-located suburbs may offer a more balanced profile of manageable cash shortfalls alongside improving capital growth prospects.

How Does Negative Gearing Compare to Positive Gearing?

A positively geared property generates more rental income than it costs to hold, creating taxable income rather than a deductible loss. The investor pays more tax in the short term but enjoys positive cash flow that does not require ongoing funding from their salary. The trade-off is that positively geared properties are often found in higher-yield, lower-growth markets, meaning the capital gain at the end may be smaller.

Neither approach is universally superior. The best strategy depends on your income, tax position, cash flow capacity, investment horizon and the specific property market you are entering. CoreLogic data indicates that gross rental yields nationally averaged around 3.8% for houses and 4.9% for units in early 2026 — figures that highlight why many house investors in capital cities remain negatively geared even with relatively low leverage.

For a comprehensive head-to-head analysis, our guide on negative gearing vs positive cash flow property walks through the numbers in detail across different investor profiles.

What Should Investors Do Before Choosing a Negatively Geared Property?

Given the current environment — elevated interest rates, potential tax reform, APRA’s new lending constraints and a diverging property market — due diligence is more important than ever. Before committing to a negatively geared strategy, investors should:

1. Model the true after-tax cash shortfall at current interest rates AND at a stressed rate 1.5% higher, to test cash flow resilience
2. Obtain a depreciation schedule from a qualified quantity surveyor before purchase, not after, to understand the non-cash deduction available
3. Review serviceability under APRA’s debt-to-income caps with your broker or lender before identifying a property
4. Seek independent tax advice from a registered tax agent or accountant who specialises in property investment
5. Monitor the federal budget for any announced changes to the CGT discount or negative gearing rules, and understand whether grandfathering provisions would apply to your purchase

Negative gearing can be a legitimate and tax-effective wealth-building strategy when applied to the right property, in the right market, by an investor with the right financial profile. It is not a tax loophole — it is the ordinary operation of Australian tax law applied to a loss-making investment. The key is understanding that the tax saving is a partial offset, not a free ride, and that the strategy only pays off if the underlying asset delivers capital growth over time.

If you are weighing up whether a negatively or positively geared property suits your circumstances right now, the Collings Real Estate team works with investors across Melbourne and surrounding markets every day. Understanding both sides of the equation — the tax mechanics and the real market conditions — is the foundation of a sound investment decision in 2026.