Negative gearing, actually explained

What it actually is

A property is “negatively geared” when the cost of holding it (loan interest + expenses) is more than the rent it earns — i.e. it runs at a loss. In Australia, that loss can currently be deducted against your other assessable income (your salary), reducing the tax you pay on everything else. The investor is betting that the after-tax cash-flow loss is outweighed by capital growth over time.

It's not a special scheme or a loophole in the technical sense — it's a consequence of two ordinary tax principles: interest on money borrowed to produce assessable income is deductible, and Australia (currently) lets losses from one income source offset another. The contention is about whether that combination should apply to passive residential property at the scale it does.

A worked example (2026 numbers)

Take the default scenario from our property investment calculator: a $1,100,000 property, $750/week rent, $880,000 loan at 6.0% P&I over 30 years, standard expenses, owned by someone on a $150,000 salary.

• Effective rent after vacancy: ~$37,830
• Cash expenses (rates, management, maintenance): ~$18,230
• Year-1 loan interest (deductible): ~$52,500
• Depreciation: ~$5,000
• Taxable rental position: ~−$37,900 (a loss)

That ~$37,900 loss is deducted against the $150,000 salary. At a 39% marginal rate (37% + 2% Medicare), that's a tax reduction of about $14,800. It doesn't make the property cash-flow positive — the investor is still ~$29,000/year out of pocket after tax — but the tax system is absorbing roughly a third of the holding loss. The investment case rests entirely on capital growth exceeding that drag.

Who it benefits

The benefit scales with your marginal tax rate. A 47%-bracket earner recovers 47c of every loss dollar; a 16%-bracket earner recovers 16c. So negative gearing is structurally most valuable to high-income investors — which is the core of the equity argument against it. The counter-argument is that it supports rental supply and that most negatively-geared investors own one property. Both things are true; the policy question is the balance.

What changes on 1 July 2027

The 2026-27 Federal Budget (delivered 12 May 2026) announced a structural change:

• From 1 July 2027, rental losses on established properties can only be deducted against residential property income — not against salary/wages. Excess losses are carried forward.
• Losses on new builds remain fully deductible against all income (the policy intent being to channel investment toward new supply).
• Grandfathering: any property held on or before Budget night (12 May 2026) keeps the existing rules. If you already own it, nothing changes for that property.

What this practically means

• Already own an investment property:no change — you're grandfathered. Don't sell purely to “beat” a change that doesn't apply to you; selling triggers CGT (see our CGT on property guide).
• Buying before the changes: a purchase settling on or before 12 May 2026 is grandfathered. After that, for established property, model the post-2027 position (negative gearing against property income only) — the after-tax benefit our calculator shows will overstate it for those purchases.
• Considering a new build: new builds retain full negative gearing — this is the deliberate policy nudge. Weigh it against new-build price premiums and depreciation differences.