How Negative Gearing Actually Works

Negative gearing is a description, not a plan. A rental property is negatively geared when the deductible costs of holding it exceed the rent it earns for the year. Those costs typically include the interest on the loan used to buy it, council and water rates, land tax, strata or body corporate fees, landlord insurance, property-management fees, repairs and maintenance, and depreciation. When the total of those exceeds the rental income, the property runs at a net rental loss for the year.

For the 2025-26 and 2026-27 income years, that net rental loss can generally be offset against your other assessable income — most commonly salary or business income — which lowers your taxable income for the year. That offset is the whole of what “negative gearing” refers to. It is not a special scheme you opt into; it is simply the ordinary deductibility of expenses incurred in earning assessable income, applied to a property that happens to cost more to hold than it earns.

That treatment changes for residential dwellings from the 2027-28 income year under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which is now law. The mechanics below describe the position for the income years to which the existing rules still apply; the enacted change, and the exceptions in it, are set out later in this guide.

Within the tax return, the rental income and the deductible holding costs are brought together in a rental schedule for the property. If costs exceed income, the resulting net rental loss reduces your overall taxable income. Because Australia has a progressive tax system, the value of that reduction depends on your marginal tax rate — the same loss is worth more, in tax terms, to someone on a higher marginal rate than to someone on a lower one.

• Rental income is added up for the year
• Deductible costs — interest, rates, insurance, management, repairs, depreciation — are totalled
• Where costs exceed income, the net rental loss reduces other assessable income
• The tax saving equals the loss multiplied by your marginal rate, broadly speaking

Crucially, the tax saving only softens the cash shortfall — it does not eliminate it. You are still funding the gap between rent and costs out of your own pocket; the deduction returns a portion of it through a lower tax bill. The way these figures are captured is set out on our rental property tax page.

This is the flow for the 2025-26 and 2026-27 income years. From the 2027-28 income year the third step above changes for residential dwellings: the excess of your residential-property deductions over your residential-property income no longer reduces other assessable income for that year. It is quarantined instead, as set out below.

Consider an illustrative, rounded example for the 2026-27 income year — general information only, not a projection for any actual property. Suppose a property earns $30,000 in rent for the year, and the deductible holding costs — interest, rates, insurance, management and a depreciation claim — come to $40,000. The property is negatively geared by $10,000: that is the net rental loss.

If the investor has a marginal tax rate of, say, 37% plus the Medicare levy, the $10,000 loss might reduce their tax by a little under $4,000. The investor is still $10,000 down on cash for the year before tax; the deduction returns roughly $4,000 of it, leaving an after-tax holding cost of about $6,000. Whether that is worthwhile depends entirely on whether the property’s capital growth and any future income are expected to more than make up that $6,000 a year over the holding period. The numbers here are purely illustrative and depend on your marginal rate, the actual costs and the relevant rules.

The same figures work differently from the 2027-28 income year, unless one of the exceptions in the enacted 2026 changes applies to the ownership interest. On those numbers the $10,000 excess would not reduce the investor’s salary income for the year. It would be quarantined — able to be applied against specified residential capital gains when a net capital gain is worked out, and otherwise carried forward to the next income year. The cash shortfall is the same $10,000; what changes is the timing and the character of the deduction, not its existence.

The central risk is straightforward: a negatively geared property loses money every year it is held, and the strategy only works if capital growth eventually exceeds the accumulated after-tax losses. Capital growth is not guaranteed, and it can be slow, flat or negative for long stretches. A deduction worth a fraction of the loss is small comfort if the property does not appreciate.

Cash flow is the second risk. The shortfall has to be funded from other income every year, and rising interest rates, a vacancy, or an unexpected repair can widen it suddenly. Gearing magnifies both gains and losses. There is also a concentration risk in tying up borrowing capacity and cash in a single, illiquid asset. None of this makes negative gearing wrong — it makes it a position that has to be entered deliberately, with the cash flow stress-tested, rather than chased for the tax deduction alone.

The changes to residential-property deductions are no longer a proposal. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49 of 2026) received Royal Assent on 26 June 2026 and is law. Schedule 2, which contains the residential-property measure, commenced on 27 June 2026. This section summarises what the guide’s readers need; for the full section-by-section analysis of Schedule 2 — including the grandfathering test, the carve-outs and the outstanding legislative instruments — see our technical resource on the negative gearing changes from 2027-28.

Commencement is not the same as application, and the difference matters. The Schedule 2 amendments apply in relation to the 2027-28 income year and later income years. The existing rules — the ones described earlier in this guide — still govern the 2025-26 and 2026-27 income years. There is no phase-in.

What the rule actually does. From 2027-28, the test is applied across your residential dwellings as a whole, not property by property. Where the amounts you could otherwise deduct for using or holding residential dwellings as residential accommodation exceed your assessable income from doing so for the year, the excess is not deductible that year. It becomes a quarantined amount, which may be applied against specified residential capital gains when your net capital gain is worked out for the year, and to the extent any of it remains it carries forward into the next income year. Negative gearing is not abolished, and the deductions are not lost — they are deferred. The one permanent forfeiture is on bankruptcy or an equivalent release from debt.

Two limits on that quarantined amount are worth knowing. It can only be applied against residential capital gains — not against a gain on shares, a business asset or commercial property — and it is applied before the capital gains tax discount step (a discount that is itself changing under the same Act from 1 July 2027), so its value depends on the discount applying to the eventual gain, the delay before that gain is realised, and the possibility that no sufficient residential gain ever arises — in many cases materially less useful than an ordinary deduction against income taxed at your marginal rate. Expenditure denied under the new rule cannot instead be pushed into the cost base or the reduced cost base.

The 12 May 2026 exception. Amounts are disregarded to the extent they relate to an ownership interest in a residential dwelling that you last acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2026. Three details in that sentence do real work. “Last acquired” means a later re-acquisition, or a further interest acquired after the cut-off, is not covered. Where the dwelling is acquired under a contract, the Act treats you as holding the ownership interest from the date you entered into the contract, not from settlement — so a contract signed before the cut-off that settles afterwards can still qualify. And the exception attaches to your ownership interest, not to the property: a buyer who acquires an established dwelling after the cut-off does not inherit it.

The new-residential-dwelling exception cannot presently operate. The Act contains an exception for a dwelling that is a “new residential dwelling” in relation to you — but the Act does not define one. The definition is left to a legislative instrument the Minister must make, and as at 13 July 2026 no such instrument had been made. Until it is, the exception has no content and cannot be relied on, and we cannot responsibly tell you what will or will not qualify. Anyone saying that only new builds can be negatively geared is wrong twice over: the rule quarantines rather than abolishes, and the new-build exception is not yet capable of operating. We are monitoring the register for the instrument.

Who is outside the rule. Complying superannuation entities and widely held unit trusts are carved out of the quarantining rule entirely. That is a technical feature of the provision, not a strategy and not a recommendation — and it does not extend to ordinary family or discretionary trusts, where residential rental income keeps its character as it flows through to beneficiaries. Separately, some dwellings fall outside the definition of a “residential dwelling” altogether, including caravans and mobile homes, hotels, motels, inns, hostels and boarding houses, student accommodation connected with a school or education institution, and boats. Commercial property is not a dwelling at all.

None of this can be applied to a portfolio from a summary. Whether a particular interest is covered by the 12 May 2026 exception, and how the quarantining and carry-forward interact with an eventual sale, turn on your specific facts and records. We work through it from your actual figures — see our property investor strategy page for how this is handled inside an engagement. This section states the law as enacted and was verified against the Act text on 13 July 2026.

Negative gearing cannot be judged in isolation. It interacts with your marginal tax rate, your cash-flow capacity, the loan structure and purpose, depreciation and its effect on the eventual capital gains cost base, land tax, the ownership structure, and — from the 2027-28 income year — the quarantining rule enacted in 2026. A sensible decision weighs all of that against your timeframe and your alternatives for the same capital — and treats the tax deduction as one factor among many, never the reason to buy.

We model the full picture from your actual figures as part of a property-investor engagement, working with your property-investor accountant and, where you want it, the investment property loan side as well. To talk it through for your situation, get in touch.

This guide is general information only and does not take into account your objectives, financial situation or needs. It is not personal tax advice and does not promise any particular tax outcome or saving. Tax treatment depends on your circumstances and on the law for the relevant income year. The statements about the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 were verified against the Act text on 16 July 2026; the legislative instrument defining a “new residential dwelling” had not been made as at that date, and the Australian Taxation Office had published only a high-level new-legislation summary of the measure — no ruling or binding guidance had been issued. Seek personal advice scoped to your situation before acting.

Source: Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (No. 49 of 2026), Federal Register of Legislation — Act text as made.