Negative Gearing Explained: How It Works & Is It Worth It in 2026?
Plain-English guide to negative gearing in Australia. How the tax benefit works, real examples with numbers, the risks involved, and whether it still makes sense as an investment strategy in 2026.
What is negative gearing?
Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates, resulting in a net loss. In Australia, this loss can be offset against your other income — including your salary — to reduce your overall taxable income. For example, if your investment property earns $25,000 per year in rent but costs $35,000 per year in mortgage interest, council rates, insurance, management fees, repairs, and depreciation, you have a $10,000 net rental loss. If your salary is $100,000, negative gearing allows you to reduce your taxable income to $90,000, saving you tax at your marginal rate. At the 32.5% marginal rate (plus 2% Medicare levy), that $10,000 loss saves you $3,450 in tax. The underlying strategy is that the property will increase in value over time, and the capital gain upon sale (taxed at a 50% discount if held for more than 12 months) will outweigh the annual rental losses and tax saved along the way.
Calculating the actual tax benefit
The tax benefit of negative gearing depends entirely on your marginal tax rate. The higher your income, the more valuable the deduction. For someone on a $120,000 salary (37% marginal rate plus 2% Medicare levy), a $10,000 rental loss saves $3,900 per year. For someone on $60,000 (32.5% marginal rate plus Medicare levy), the same $10,000 loss saves $3,450. After the Stage 3 tax cuts, the 30% rate applies to income between $18,201 and $135,000, meaning most negatively geared investors now save 30 cents per dollar of rental loss plus the 2% Medicare levy. The critical calculation is the after-tax out-of-pocket cost. If your property loses $10,000 per year before tax, and you get a $3,200 tax refund from negative gearing, your real cash outlay is $6,800 per year — or about $131 per week. You are essentially betting that the property's capital growth will exceed this cumulative cash drain over your holding period. Use our Tax Calculator to model exactly how a rental loss changes your tax position.
The risks: cashflow pressure and capital loss
Negative gearing is not a guaranteed strategy — it relies on the assumption that the property will grow in value faster than the cumulative losses. If the property does not appreciate, or worse, falls in value, you have lost money on both the income side and the capital side. Interest rate rises are another major risk. A $500,000 variable-rate mortgage at 6.5% costs $32,500 per year in interest alone. If rates rise to 7.5%, that jumps to $37,500 — an extra $5,000 per year in losses. Vacancy periods mean zero rental income while costs continue. If your property sits empty for six weeks between tenants, that is $2,900 in lost rent on a $25,000 annual income. Maintenance and unexpected repairs — a new hot water system ($2,000), roof repairs ($5,000), or compliance upgrades — can blow out your annual losses well beyond projections. Cash flow pressure is real: you must fund the shortfall between rent and expenses every month from your own pocket, and the tax benefit only arrives once a year when you lodge your return (unless you apply for a PAYG withholding variation).
Positive gearing: the alternative approach
Positive gearing means your rental income exceeds all property expenses, generating a net profit. While you pay tax on that profit, you have a property that is self-funding from day one — no monthly cash drain, no reliance on capital growth to break even. Positively geared properties are typically found in regional areas or smaller capital city markets where purchase prices are lower relative to rental yields. A $350,000 property renting for $400 per week ($20,800 per year) with $15,000 in annual expenses generates a $5,800 profit. You pay tax on that profit, but you also have $5,800 in positive cash flow before tax. The trade-off is that these properties may have lower capital growth prospects than more expensive capital city properties. Many experienced investors start with negatively geared properties in growth areas and gradually shift to positively geared properties as their portfolio matures, rents increase, and loans are paid down. The ideal outcome is a property that starts negatively geared but transitions to positive gearing over time as rent grows and the loan balance decreases.
Political risk: will negative gearing be abolished?
Negative gearing has been a political flashpoint in Australia for over a decade. The Labor Party took a policy to limit negative gearing to new-build properties to the 2019 federal election, which it lost. The policy was subsequently shelved, and negative gearing on existing properties remains available. However, the debate has not gone away. Housing affordability concerns, budget pressures, and international comparisons (most comparable countries do not allow losses on residential property to be offset against employment income) keep the reform conversation alive. The risk for investors is that a future government may restrict or abolish negative gearing for existing properties, potentially grandfathering current investors but removing the benefit for new purchases. If negative gearing were removed, the immediate impact would be higher after-tax holding costs for loss-making properties, potentially reducing demand and price growth. For investors currently relying on negative gearing, it is worth stress-testing your investment on the assumption that the tax benefit could be reduced or removed — if the property only works because of the tax deduction, it may be a fragile investment.
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General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.
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