Negative gearing, explained in plain numbers.

What is negative gearing?

For a property that qualifies, the rental loss is deducted from other taxable income, such as your salary. That reduces your income tax. The tax saving depends on the amount of the deductible loss and the tax rate applied to it: a $10,000 loss deducted at an assumed 35% rate saves $3,500 in tax.

Why do investors use negative gearing?

Investors borrow to buy a property for its rental income and long-term growth. In the early years, interest and other expenses can exceed the rent. Negative gearing reduces the after-tax cost of holding that property while the investor builds equity through growth in its value.

The investment decision starts with the location, purchase price, rental demand and growth drivers. The tax saving then forms part of the cash-flow calculation. A property with a lower rental yield and stronger growth prospects needs a different holding budget from one with a higher rental yield. The investor needs to know the annual contribution required and how that fits their income and plans.

How does depreciation affect negative gearing?

Depreciation provides deductions for eligible building costs and assets such as carpets, appliances and air conditioning over time. It reduces taxable income without requiring a cash payment in the year the deduction is claimed. This is why the taxable rental loss can be larger than the cash shortfall.

There are two parts: capital works deductions for eligible construction costs, and deductions for the decline in value of eligible fixtures and fittings. Building deductions apply to both new and established properties where the construction date and remaining deduction period qualify. Deductions for second-hand fittings in established homes are generally restricted for individual investors; new eligible fittings are deductible.

A quantity surveyor's depreciation schedule separates the building and asset deductions and sets out the amounts for each year. Year-one depreciation depends on the construction cost, assets and time the property is available for rent. It is not a fixed percentage of the purchase price, and the land itself is not depreciable.

Does negative gearing always mean a cash loss?

No. Work out the cash flow and the tax result separately. Cash flow before tax is rent minus the money paid in interest and operating expenses. The tax calculation also includes eligible non-cash deductions such as depreciation. Cash flow after tax includes the resulting tax saving.

A property can cover its cash expenses and still report a taxable loss because of depreciation. A tax saving can also turn a before-tax cash shortfall into positive after-tax cash flow. Where a shortfall remains, that is the investor's net contribution. Expenses must still be funded as they fall due, including before a tax refund is received.

Which properties qualify?

From 1 July 2027, rental losses from established homes acquired after 7:30pm AEST on 12 May 2026 are restricted to residential property income, including capital gains. Unused losses carry forward. Losses incurred up to 30 June 2027 can still be offset against salary.

Properties owned or under contract before the cutoff retain their existing treatment. Eligible new builds that add to housing supply retain access to deductions against other income. A rebuild that does not add housing supply does not qualify as a new build for this purpose. See the Treasury rules.

Investors can use equity in an existing property to fund a deposit or purchase. Include interest on that additional borrowing when modelling the cash flow. Interest deductibility follows what the borrowed money is used for, rather than which property secures the loan.