Negative gearing is what happens when an investment costs you more to hold than it earns. Rent comes in, interest and expenses go out, and the expenses win. You are running the investment at a loss, on purpose, betting it climbs in value by more than the loss costs you to carry.
People usually mean property when they say it, though the idea works the same on any geared investment. And under the rules in force today, that loss does something useful: it comes off your other income, including your salary, so your tax bill drops. The tax saving is a big part of why people do it.
One thing to get straight first, because the timing matters this year. The negative gearing changes you have seen in the news, the ones from the May 2026 Budget, are not the law right now. I will come back to them. Today, the long-standing rules still apply, and the rest of this explains how they work.
Negative, neutral, positive
Three ways a geared investment can sit. Negatively geared: costs beat income, so you run a loss. You are out of pocket each year, you get a tax benefit under current rules, and you are leaning on growth to make it worth it. Neutrally geared: income and costs roughly cancel, so it neither funds you nor drains you. Positively geared: income beats costs and the property turns a profit. Better cash flow, but the surplus is taxable income.
None of these is automatically the clever one. Negative gearing trades cash flow now for a tax benefit and a growth bet. Positive gearing takes the cash now, and the tax bill that rides with it.
How the tax part actually works
The mechanics are simpler than the politics. Take an investor on a $130,000 salary who buys a rental. Across the year the rent brings in less than the interest, rates, management fees and upkeep cost to run it, and the property runs a $12,000 loss.
That $12,000 comes off the salary. Taxable income drops from $130,000 to $118,000. At a 37% marginal rate, that is roughly $4,440 less tax for the year.
Figure 1. A worked example on current rules. The saving softens the loss; it does not erase it.
So the property still costs the investor money each year. Negative gearing does not make a loss vanish. It makes the loss cheaper to carry, and leaves you holding an asset you expect to be worth more later. The whole thing only pays off if that growth shows up.
What I tell clients. The tax saving is the part people fixate on, and the cash-flow drain is the part that actually catches them out. A property losing $12,000 a year still needs that $12,000 funded from somewhere, every year, long before any growth turns up. The investors who do well with it are the ones who can comfortably carry the shortfall and are not counting on the refund to make the repayments. Since the May 2026 Budget I have started leading with a question I never used to ask first: when did you sign, and is it an established place or a new build? Right now that one date decides which rulebook a purchase will end up sitting under.
What you can and cannot claim
The loss is only as good as the expenses behind it, and not everything counts.
Expense | Claim it? | How it works |
Loan interest | Yes | While the property is rented or genuinely available for rent |
Council and water rates, land tax | Yes | In the year you incur them |
Property management and agent fees | Yes | Plus advertising to find tenants |
Repairs and maintenance | Yes | Restoring condition (repainting, fixing). Not improvements |
Insurance | Yes | Landlord, building and contents cover |
Capital works (the building) | Spread | Division 43: 2.5% a year over 40 years |
New plant and equipment | Yes | Division 40: decline in value over its effective life |
Second-hand plant in an established home | No | Removed from 1 July 2017 for most investors |
Travel to inspect the property | No | Removed from 1 July 2017 for residential rentals |
Initial repairs before the first tenant | No | Treated as capital, folded into the cost base |
Table 1. Common residential rental expenses under current rules. Improvements differ from repairs: a genuine repair is claimable now, a new kitchen is capital works claimed slowly.
Two carve-outs catch people, both in since 1 July 2017. You cannot claim travel to inspect or maintain a residential rental anymore. And you cannot depreciate second-hand plant and equipment that came with an established home, only new assets you buy yourself.
What the 2026 Budget changes
Here is the part that matters this year, and the part to handle with care. On 12 May 2026 the Federal Budget announced a change to negative gearing on residential property. It is not yet law, it still has to pass Parliament, and it is intended to start on 1 July 2027. Nothing about it touches your current-year return.
When it does start, it narrows negative gearing for one group: people who buy an established (existing) residential property after 7:30pm on Budget night, 12 May 2026. For those properties, from 1 July 2027, a rental loss can no longer come off salary or other income. It can only offset rental income or capital gains from residential property, and anything left over carries forward to later years.
Three groups are left alone. If you already held the property, or were under contract, before 7:30pm on 12 May 2026, you are grandfathered and the current rules keep applying for as long as you own it. New builds are exempt, so full negative gearing continues on a newly built property, a deliberate carve-out to keep encouraging supply. And there is a transition window: an established property bought between Budget night and 30 June 2027 can still be geared in full until then, with the restriction biting from 1 July 2027.
Figure 2. Which set of rules a property lands under, by purchase date and type. Announced 12 May 2026, not yet law, intended from 1 July 2027.
The capital gains side moves at the same time. From 1 July 2027 the 50% CGT discount is set to be replaced with cost base indexation plus a 30% minimum tax on net capital gains, for individuals, trusts and partnerships, across CGT assets generally. For property you already own, the gain gets split: growth up to 1 July 2027 keeps the old 50% discount, growth after that uses the new method.
All of it still has to clear Parliament, and detail can shift on the way through. That is the plain reason not to rebuild your plans around it yet.
The take
Negative gearing was never a money-maker on its own. It is a way to hold a growth asset at a softened cost, and it only works if the asset grows and you can carry the loss while you wait. The 2026 changes do not kill it, they aim it: new builds and existing owners keep what they had, new buyers of established homes lose the salary offset from 2027.
If you are weighing a purchase right now, the date you sign and the kind of property you buy decide which rules you land under. That is a conversation worth having with a registered tax agent before you commit, not after, and the purchase date is the first thing I raise now. Our Tax Assistant runs a rental position against current ATO rules and flags which gearing rules apply to a given purchase date, with a registered tax agent signing off before anything is relied on.
Technical reference
Mechanism. Negative gearing is not a standalone concession. A net rental loss is deductible against assessable income under the general deduction provision, section 8-1 of the Income Tax Assessment Act 1997 (Cth), where the expenses are incurred in producing assessable rental income. Loan interest is deductible while the property is rented or genuinely available for rent.
Deductions and limits (current). Capital works on the building: Division 43 ITAA 1997, generally 2.5% per year over 40 years. Decline in value of plant and equipment: Division 40. Second-hand depreciating assets in residential rental property: deduction denied for most investors under section 40-27 for assets acquired after 7:30pm AEST 9 May 2017, effective from the 2017-18 year. Travel relating to residential premises: deduction denied under section 26-31 from 1 July 2017 (exceptions for taxpayers carrying on a business of letting or excluded entities, and for commercial property). Repairs: section 25-10; initial repairs and improvements are capital, not immediately deductible.
Capital gains (current). On sale, capital gains tax applies. Individuals, trusts and partnerships holding a CGT asset for more than 12 months currently access the 50% CGT discount under Division 115.
Announced reform (not yet law). On 12 May 2026, as part of the 2026-27 Federal Budget, the Government announced reforms to negative gearing and CGT. The measure is not yet law (Treasury Laws Amendment (Tax Reform No. 1) Bill 2026) and is intended to apply from 1 July 2027. Negative gearing on established residential property acquired after 7:30pm AEST 12 May 2026 would be restricted: net rental losses deductible only against residential rental income or capital gains from residential property, with excess carried forward. Properties held, or under contract, at 7:30pm AEST 12 May 2026 are grandfathered under current rules until sold. New builds are excluded. Widely held trusts and managed investment trusts, superannuation funds including SMSFs, and build-to-rent are excluded. A transition allows full negative gearing on an established property bought between 12 May 2026 and 30 June 2027 until 30 June 2027.
Announced CGT reform (not yet law). From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships would be replaced with cost base indexation and a 30% minimum tax on net capital gains, applying across CGT assets generally. For assets held at 1 July 2027, gains are split: growth to 1 July 2027 retains the 50% discount; growth after uses the new method.
Sources: Income Tax Assessment Act 1997 (Cth) ss 8-1, 25-10, 26-31, 40-27, Div 40, Div 43, Div 115; ATO, Rental expenses and Residential rental properties guidance; ATO, Tax reform: boosting home ownership (reforming negative gearing and capital gains tax); Australian Government, Budget 2026-27, Budget Paper No. 2. Current to June 2026. The 12 May 2026 Budget measures are announced but not yet enacted.
