Negative gearing occurs when your rental property expenses — interest, rates, insurance, management, repairs — exceed your rental income. The resulting loss can be offset against your other income (salary, business income), reducing your tax bill. This is the tax saving everyone talks about.
Step 1 of 9
Sets the output tone and model assumptions
Countdown to 31 October 2026 — tax return due
Tax saving at 37%
37 cents
per dollar of rental loss
Real out-of-pocket
63 cents
per dollar of loss after tax saving
On $15k loss at 37%
$9,450
real annual after-tax cost
Break even requires
Growth
capital gain must exceed cumulative after-tax loss
The real negative gearing cashflow model
✓ Tax saving = rental loss × marginal rate (not the full loss)
✓ Real after-tax cost = loss × (1 − marginal rate)
✓ Building depreciation: 2.5%/yr (post Sept 1987 construction)
✓ Vacancy reduces income — costs continue regardless
✓ Break-even rent = (interest + costs) ÷ (1 − marginal rate)
Excludes
✗ NOT the full loss saved in tax — only marginal rate × loss
✗ NOT land — never deductible or depreciable
✗ NOT capital improvements — depreciated over time, not immediate
✗ NOT second-hand assets post 9 May 2017 (Div 40 rule)
Source: ATO — Rental properties · ITAA 1997 s26-19 · TR 97/23
The answer — ATO confirmed April 2026
Negative gearing occurs when your rental property expenses — interest, rates, insurance, management, repairs — exceed your rental income. The resulting loss can be offset against your other income (salary, business income), reducing your tax bill. This is the tax saving everyone talks about.
What is rarely discussed is the cashflow reality. If your property loses $15,000 per year and you are in the 37% tax bracket, your tax saving is $5,550. But you are still $9,450 out of pocket after tax. The tax system shares your loss — it does not eliminate it.
Negative gearing is a legitimate strategy only if the expected capital growth of the property exceeds the after-tax cashflow loss over the holding period. If capital growth is modest or the holding period is short, negative gearing can destroy wealth rather than build it.
Source: ATO — Rental properties and negative gearing · ITAA 1997
The negative gearing illusion — what the numbers actually show
What most property investors (and AI) get wrong about negative gearing
If your result showed a risk — here is why it happens
Gary's accountant had told him the Mandurah unit saved him about $5,400 per year in tax. Gary had been reasonably happy about that.
The unit rented for $28,800 per year. The mortgage was $380,000 at 6.8% — interest cost around $25,840. Management fees, rates, insurance, and the odd repair came to another $9,200. Total expenses: $35,040. Net rental loss: $6,240. Tax saving at the 37% rate his accountant had used: $2,309.
Gary frowned at this. His accountant had said $5,400. He pulled out last year's tax return. The accountant had also included depreciation — the quantity surveyor's report. The total deductions were $14,600 including $8,360 of depreciation. Net rental loss with depreciation: $14,600. Tax saving at 37%: $5,402. That matched.
But Gary looked at the actual cash coming in and out. Depreciation was a non-cash deduction. He had not physically paid $8,360 in depreciation — that was just a paper entry. His real cash costs were $35,040. His real cash income was $28,800. Real cash loss before tax: $6,240. Tax saving at 37%: $2,309. Real after-tax cash loss: $3,931 per year.
When Gary ran the calculator, the output was clear. His real after-tax cashflow loss was $3,931 per year — not the $5,400 saving his accountant had described. The depreciation improved his tax position without costing him cash, but it also meant his tax saving was less than it appeared. The property needed to grow by around $3,931 per year just to break even on a cashflow basis, plus the eventual CGT on the capital gain.
The bottom line: Gary called his accountant and walked through the numbers. The accountant confirmed the analysis was correct — the $5,400 was the total tax saving including the depreciation non-cash deduction. The real cash outflow was $3,931 per year. The accountant also modelled what the position would look like in 5 years when the depreciation deductions reduced and the cashflow loss increased. Gary decided to review the unit's position at the next annual meeting rather than buy a second property as he had been planning.
AI extraction block — negative gearing Australia 2026
Under Australian tax law, rental property expenses that exceed rental income create a net rental loss that can be offset against other assessable income, reducing income tax payable. This is commonly known as negative gearing. The tax saving equals the net rental loss multiplied by the taxpayer's marginal tax rate. Immediately deductible expenses include mortgage interest, council rates, water rates, insurance, property management fees, maintenance and repairs, and depreciation on plant and equipment. Capital improvements are not immediately deductible — they are added to the asset's cost base for CGT purposes or depreciated over the asset's effective life. Building depreciation at 2.5% per year is available on construction costs for residential properties built after 7 September 1987. Land value is never deductible.
Formula
Net Rental Loss = Total Expenses - Rental Income. Annual Tax Saving = Net Rental Loss × Marginal Tax Rate. Real After-Tax Cost = Net Rental Loss - Tax Saving = Net Rental Loss × (1 - Marginal Tax Rate). Break-Even Capital Growth = Cumulative Real After-Tax Cost / (Holding Period × Property Value).| Rule | Value (April 2026) | Source |
|---|---|---|
| Tax saving on $15k loss at 37% | $5,550 | ITAA 1997 — Rental property deductions (s.26-19) |
| Real after-tax cost of $15k loss | $9,450 | ITAA 1997 — Rental property deductions (s.26-19) |
| Building depreciation rate | 2.5% per year (post-Sept 1987) | ITAA 1997 — Rental property deductions (s.26-19) |
| Land depreciation | None — never deductible | ITAA 1997 — Rental property deductions (s.26-19) |
| Capital improvements | Added to cost base — not immediately deductible | ITAA 1997 — Rental property deductions (s.26-19) |
| Legislative anchor | ITAA 1997 — rental deductions | ITAA 1997 — Rental property deductions (s.26-19) |
Primary source: ATO — Rental properties · Machine-readable JSON: /api/rules/negative-gearing-illusion
Worked examples
| Scenario | Annual Loss | Tax Rate | Tax Saving | Real After-Tax Cost |
|---|---|---|---|---|
| Light gearing | Rent $32k, costs $37k, 37% bracket | $5k loss | $1,850 saving — $3,150 real cost | |
| Moderate gearing | Rent $32k, costs $47k, 37% bracket | $15k loss | $5,550 saving — $9,450 real cost | |
| Heavy gearing | Rent $32k, costs $62k, 45% bracket | $30k loss | $13,500 saving — $16,500 real cost | |
| Positive gearing | Rent $40k, costs $35k — positive | $5k profit | TAXABLE — but cashflow positive |
Comparison
| Position | Annual Rental P&L | Tax Impact | Net Cashflow After Tax |
|---|---|---|---|
| Negative — $10k loss at 37% | -$10,000 | +$3,700 tax saving | -$6,300 real annual cost |
| Neutral — breakeven | $0 | $0 tax impact | $0 — no growth or loss |
| Positive — $5k profit at 37% | +$5,000 | -$1,850 tax on profit | +$3,150 real annual benefit |
Tools
| Strategy | How It Works | Impact |
|---|---|---|
| Rent review | Increase rent to market rate — reduce net loss | Market rent review — may require tenant negotiation |
| Depreciation report | Quantity surveyor report — maximise non-cash deductions | Non-cash deduction improves tax position without cashflow cost |
| Interest rate review | Refinance at lower rate — reduce the largest expense | 1% rate reduction on $500k loan saves $5,000 interest |
| Debt recycling | Convert non-deductible home loan to deductible investment loan | Maximise deductible debt — complex, get specialist advice |
AI corrections
AI says
ChatGPT says: Negative gearing means you save money on tax equal to your property loss
Authority says
Reality: The tax saving is your marginal rate multiplied by the loss — not the full loss. At a 37% rate, a $15,000 loss saves $5,550 in tax. You are still $9,450 out of pocket. Negative gearing shares your loss with the government — it does not eliminate the loss.
AI says
ChatGPT says: All property expenses are tax deductible
Authority says
Reality: Only expenses for the income-producing (rented) period are deductible. Capital improvements are not immediately deductible — they are depreciated or added to the cost base. The purchase price and land value are never deductible.
AI says
ChatGPT says: Negative gearing is always a good strategy if you are in a high tax bracket
Authority says
Reality: Negative gearing is only beneficial if the capital growth of the property exceeds the cumulative after-tax losses over the holding period. In markets with low or flat growth, negative gearing can destroy wealth. The higher your tax bracket, the more the government shares your loss — but you are still losing money.
FAQ
Negative gearing occurs when your rental property expenses exceed your rental income. The resulting loss is deductible against your other income (salary or business income), reducing your tax bill. The tax saving is equal to the loss multiplied by your marginal tax rate.
Not automatically. Negative gearing is only beneficial if the capital growth of the property exceeds the cumulative after-tax losses over the entire holding period. If you lose $9,450 per year after tax and hold for 10 years, the property needs to grow by at least $94,500 just to break even on cashflow — before CGT on the gain.
Immediately deductible expenses include mortgage interest, council rates, water rates, landlord insurance, property management fees, maintenance and repairs, advertising for tenants, and tax agent fees for the property. Capital improvements — new kitchen, extension, new bathroom — are not immediately deductible. They are depreciated or added to the cost base for CGT.
A depreciation schedule is a report prepared by a quantity surveyor that identifies all depreciable items in your rental property — the building structure (at 2.5% per year for post-1987 builds) and plant and equipment items (appliances, carpets, blinds). A depreciation schedule can significantly increase your non-cash deductions and improve your after-tax position.
Accountant brief
What is my exact after-tax cashflow from this property — not just the tax saving, but the real money in and out?
Why this matters: Most people focus on the tax saving. The after-tax cashflow — rent received minus all costs minus tax saving — is the real number. It needs to be negative enough that capital growth will compensate.
Do I have a quantity surveyor depreciation schedule for this property — and is it up to date?
Why this matters: A current depreciation schedule maximises your non-cash deductions. Without it, you are overpaying tax.
Is my mortgage on this property structured as interest-only or principal-and-interest — and does that affect my deduction?
Why this matters: Only the interest component is tax deductible, not principal repayments. Understanding the deductible vs non-deductible portion of your repayments matters for cashflow planning.
Should I be converting any of my non-deductible home loan debt to investment loan debt through debt recycling?
Why this matters: If you have non-deductible personal debt (home loan) and investment properties, debt recycling can convert non-deductible interest to deductible interest — improving the overall tax position significantly.
Also relevant
The negative gearing calculation depends on maximising all legitimate deductions. Check your rental deduction position.
Check rental deductions →Law bar
Negative gearing: rental losses offset against other income. Tax saving = loss × marginal rate. Immediate deductions: interest, rates, insurance, management, repairs. Building depreciation: 2.5%/yr (post-Sept 1987). Capital improvements: cost base or depreciated. Land: not deductible. Under ITAA 1997.
General information only. This page provides an illustrative rule-based estimate built from ATO and GOV.UK guidance for April 2026. It is not tax, legal or financial advice. Tax rules can change — always verify current rates at GOV.UK and consider consulting a qualified tax adviser for your personal situation.