Negative Gearing Australia 2026: How It Actually Works and Worked Examples
How negative gearing actually works for Australian property investors in 2026 — still legal under current law, the interaction with the 50% capital gains discount, worked tax examples showing the actual tax saving on a typical investment property, and the political debate over whether it should be reformed.
By FreeFinCalc Editorial · Updated April 9, 2026 · Australia 2025-26 financial year data
Negative gearing is the Australian tax practice of borrowing money to buy an income-producing investment (most commonly residential property) where the costs of holding the investment — interest, depreciation, repairs, insurance, council rates, property management — exceed the rental income, creating an annual loss. Under Australian tax law, that loss can be deducted from your other income (salary, business income) to reduce your overall tax bill. Combined with the 50% capital gains tax discount on assets held longer than 12 months, this creates a powerful tax-driven incentive to invest in residential property and accept short-term losses in exchange for long-term capital growth that is taxed at half rates. As of 2026 negative gearing remains fully legal under federal law despite multiple political proposals to reform or restrict it.
A Typical Negative Gearing Worked Example (2025-26)
An Australian resident on a $130,000 salary buys a $700,000 investment unit in a Brisbane suburb with a 20% deposit ($140,000) and a $560,000 interest-only investment loan at 6.5%. Annual costs and income for the first year:
| Item | Annual amount |
|---|---|
| Rental income (52 weeks at $550/week, 95% occupancy) | $27,170 |
| Less: Interest on loan ($560,000 at 6.5%) | -$36,400 |
| Less: Property management (8% of rent) | -$2,174 |
| Less: Council rates and water | -$3,200 |
| Less: Insurance (landlord + building) | -$1,500 |
| Less: Repairs and maintenance | -$2,000 |
| Less: Depreciation (building + fixtures) | -$8,000 |
| Cash loss before depreciation | -$18,104 |
| Tax loss including depreciation | -$26,104 |
| Tax saving at 39% marginal rate | +$10,181 |
| True after-tax annual cost | -$15,923 |
How Negative Gearing Interacts with Capital Gains
The full case for negative gearing only works in combination with the 50% capital gains tax discount on assets held longer than 12 months. Suppose the same $700,000 unit grows in value to $900,000 over 7 years. On sale, the $200,000 capital gain is reduced by 50% to a $100,000 taxable gain, taxed at the investor's marginal rate. At a 39% marginal rate that is $39,000 of CGT, leaving a $161,000 after-tax capital gain. Across 7 years of holding, the investor took roughly $16,000 a year of after-tax cash losses (about $112,000 total), so the net after-tax profit is about $49,000 — a modest 7% total return on the $140,000 deposit. The math only really works if capital growth is much stronger than this — and depends critically on suburb selection and timing.
The 50% Capital Gains Tax Discount
The 50% CGT discount was introduced in September 1999 and applies to most capital gains made by Australian individuals (and some trusts) on assets held longer than 12 months. The discount halves the assessable gain, so the effective top rate of CGT for a top-bracket taxpayer is 23.5% rather than 47%. The discount does NOT apply to: assets held less than 12 months, gains made by companies, gains from carrying on a business of trading. The combination of negative gearing (income tax deduction at marginal rate during holding period) plus the 50% CGT discount (only half the gain taxed on sale) is what makes Australian investment property so tax-effective compared to most other countries.
The Case For and Against Reform
Critics argue negative gearing inflates house prices, distorts investment toward existing housing rather than productive assets, and is a regressive tax break that disproportionately benefits higher-income earners (who get the biggest deduction at the highest marginal rate). Supporters argue it encourages private rental supply, that restricting it would reduce rental availability and push up rents, and that grandfathering existing investors while restricting new entrants would create a two-tier market. The 2019 federal election was partly fought over Labor's proposal to restrict negative gearing to new builds only — Labor lost the election and abandoned the policy. As of April 2026 there are no current legislative proposals to change the rules.
Should You Negatively Gear?
Negative gearing only makes financial sense if: 1) you are in a high marginal tax bracket (37%+) so the tax deduction is worth the most, 2) you can comfortably afford the cash shortfall each year for many years without financial stress, 3) you have strong reason to expect capital growth above the long-term average (good location, supply constraints, demographic tailwinds), and 4) you are buying for the long term (10+ years) and not trying to time the market. If you cannot tick all four boxes, alternative investments (shares, ETFs, your own home) usually produce better risk-adjusted returns without the leverage and concentration risk of a single property in a single suburb.
Frequently Asked Questions
Is negative gearing still legal in Australia in 2026?+
Yes. Negative gearing remains fully legal under Australian federal tax law as of 2026. Investors can still claim losses on rental properties as deductions against their other income, including salary income. There have been multiple political proposals to reform or restrict it (most notably the Labor 2019 election platform), but none have passed into law. The 2024-25 federal budget did not contain any negative gearing reform proposals.
How does negative gearing actually save tax?+
When the costs of holding an investment property (interest, council rates, insurance, repairs, depreciation) exceed the rental income, the property generates a "loss." Under Australian tax law, that loss can be deducted from your other income on your tax return, reducing your taxable income and therefore your tax bill. A $20,000 negative gearing loss for someone on the 39% marginal tax rate generates $7,800 of tax savings — making the true after-tax cost of the loss only $12,200, not $20,000.
What is the 50% capital gains discount?+
When you sell an investment property (or shares, or other CGT assets) that you held for more than 12 months, only 50% of the capital gain is added to your taxable income for that year. The other half is tax-free. So a $200,000 capital gain becomes only $100,000 of taxable income. At a 39% marginal rate, that means you pay $39,000 in CGT instead of $78,000. The 50% discount applies to individuals and most trusts but NOT to companies. It was introduced in September 1999 as a simpler replacement for the previous CGT indexation rules.
How much can you negatively gear?+
There is no annual cap on negative gearing losses under current Australian tax law. You can deduct the full loss against your other income each year, no matter how large. However, if your total losses exceed your other income for the year, the excess loss is carried forward to future tax years rather than refunded. Most investors structure their finances so the negative gearing loss is around 30-50% of their other income to maximize the tax benefit while still having cash flow to live on.
Is negative gearing worth it in 2026?+
It depends entirely on your tax bracket, the property's capital growth potential, and your cash flow stability. With investment loan rates around 6.5% in 2026, negative gearing only makes sense if you have strong conviction the property will achieve capital growth well above the cost of holding it after tax. For a top-bracket taxpayer (47%) with a property in a high-growth suburb, the tax math can still work — but for someone in a lower tax bracket or buying in a flat market, the after-tax math often favours other investments like share index funds.
What expenses can I claim on a rental property?+
Deductible expenses include: loan interest (but NOT principal), council rates, water charges, land tax, body corporate fees, insurance, property management fees, advertising for tenants, real estate agent commissions, repairs and maintenance (not improvements), pest control, garden maintenance, depreciation on the building structure (Division 43), depreciation on plant and equipment (Division 40, restricted for second-hand items since 2017), travel for inspections (severely restricted since 2017), and accounting fees. A quantity surveyor's depreciation report typically costs $500-$700 and can identify $5,000-$15,000 a year of depreciation deductions.
Can I negatively gear shares?+
Yes. The same negative gearing principle applies to any income-producing investment, including shares. If you borrow money to buy shares and the loan interest plus other costs exceed the dividends, you have a tax loss that can be offset against other income. This is sometimes called a "margin loan" strategy. The risks are different from property: shares can crash 30-50% in months, triggering margin calls that force you to sell at the worst time. Most financial advisers consider negatively geared share strategies appropriate only for sophisticated investors with strong incomes and high risk tolerance.
When should I sell a negatively geared property?+
There is no right answer, but the most common strategies are: 1) Hold until retirement and sell when you have low other income (CGT applies at low marginal rates). 2) Sell when the property becomes positively geared (rental income exceeds costs) which removes the tax benefit. 3) Sell when you no longer believe in further capital growth in that area. 4) Sell when major repairs are needed that exceed your budget. Always factor in the substantial transaction costs of selling property: agent commissions (2-3%), stamp duty was already paid on purchase, legal fees, marketing, and any CGT owed. Round-trip transaction costs of 5-7% of the property value mean you generally need significant capital growth to come out ahead.
Sources & Disclaimer
Negative gearing rules: ATO Rental properties page. Capital Gains Tax discount: ATO 50% discount on capital gains page. Division 40 and Division 43 depreciation: Tax Laws Amendment (Housing Tax Integrity) Act 2017. ATO Rental Properties guide (NAT 1729). Treasury negative gearing analysis: Treasury Working Paper. This article is for educational purposes only and is not personalised tax advice.