What is negative gearing?
Negative gearing happens when the costs of owning your investment property — loan interest, council rates, insurance, maintenance, depreciation — add up to more than the rent it pays you. The difference is an annual loss, and under Australian tax law, you can offset that loss against your other taxable income (your salary, your business income, other investment returns).
That's the whole thing. Your property loses money on paper; the paper loss reduces your tax bill. The real money still goes out the door each month, but a portion of it comes back as a tax refund. The strategy assumes the property's capital value is growing faster than the after-tax holding cost — that's what makes it a strategy instead of a slow bleed.
In Australia, negative gearing has been legal since 1985 and is used by around 1.3 million investors. The rules are set at the Commonwealth level by the ATO. State-level rules (tenancy, land tax, stamp duty) don't affect the negative gearing calculation itself, though they shape your gross numbers.
The negative gearing formula
Annual loss = Rental income − (Interest + Expenses + Depreciation)
Tax benefit = Annual loss × Marginal tax rate
True after-tax cost = Annual loss − Tax benefit
Most landlords stop at the first line. The number that actually matters — what the property costs you in the real world — is the third one.
What you can claim as a deduction
The ATO allows a long list of deductions against rental income. The main ones:
- •Loan interest. Usually the biggest single deduction. Only the interest portion of the mortgage — principal repayments are not deductible.
- •Council rates and water charges. Apportioned to the current financial year. Multi-quarter rates notices need to be split.
- •Landlord insurance premiums. Fully deductible in the year paid.
- •Strata / body corporate fees. Quarterly levies are fully deductible. Special levies for capital improvements have tricky rules — check with your accountant.
- •Property management fees. The agent's management fee, letting fee, and inspection fees.
- •Repairs and maintenance. Deductible in full in the year paid. But "improvements" (anything that makes the property better than before) must be depreciated under Division 40 or 43 instead.
- •Depreciation — Division 40. Plant and equipment (dishwashers, carpets, blinds, aircon). 4–10 year useful life.
- •Depreciation — Division 43. Capital works (the building itself). 2.5% per year over 40 years for post-1987 builds.
- •Advertising for tenants. Listing fees, photography, signage.
- •Legal fees for lease preparation. Only for lease drafting. Legal fees for buying the property go to the cost base instead.
- •Pest control and cleaning. Between tenancies or ongoing.
- •Travel. Generally not deductible since 2017 — rare exceptions for property managers and corporate landlords.
Division 40 vs Division 43 depreciation — the bit most landlords get wrong
Depreciation is where the real money hides. It's also where most self-managing Australian landlords leave money on the table.
There are two separate regimes:
Division 40 — plant & equipment
Things with a limited useful life that wear out or get replaced.
- • Carpets (8–10 yrs)
- • Dishwashers (10 yrs)
- • Blinds / curtains (6 yrs)
- • Aircon units (10–20 yrs)
- • Ovens, rangehoods, cooktops
- • Smoke alarms, hot water systems
Note: since 2017 rules, second-hand Division 40 items can only be depreciated if you bought the property new or did the install yourself.
Division 43 — capital works
The building itself and fixed structural improvements.
- • The building (2.5% per year, 40 years)
- • Driveways, fences, retaining walls
- • Built-in kitchen cabinets
- • Bathrooms (fixed fixtures)
- • Decks, pergolas, swimming pools
- • Renovations you paid for as owner
Applies to buildings constructed after 15 September 1987. Older buildings can still claim for renovations done after that date.
Here's the thing: most landlords over five years in just forget about Division 43. The building depreciation is silent — no invoice, no receipt, no annual prompt. But on a 2010-build apartment with a $400,000 construction cost, it's $10,000/yr in deductions you aren't claiming. That's $3,000 to $4,500/yr in tax benefit depending on your marginal rate.
The fix: get a quantity surveyor's depreciation schedule. One-off cost typically $600–$800 (tax-deductible itself). It maps every Division 40 asset and the Division 43 construction cost for the building's remaining 40-year life. You use that one schedule every year — your accountant won't write it for you. PropAlly's PropertyTax module will extract every line item from a QS schedule PDF automatically once you upload it.
ATO 2025-26 tax brackets
Your marginal rate determines how much tax benefit you get from every dollar of loss. Higher earners save more in absolute terms.
| Taxable income | Tax rate | Tax benefit per $1,000 loss |
|---|---|---|
| $0 – $18,200 | 0% | $0 |
| $18,201 – $45,000 | 16% | $160 |
| $45,001 – $135,000 | 30% | $300 |
| $135,001 – $190,000 | 37% | $370 |
| $190,001+ | 45% | $450 |
The Medicare levy (2%) is additional for most earners, which effectively increases each bracket by 2 percentage points. A simplified negative gearing calculator generally ignores the Medicare levy; a precise one includes it.
Worked example — a $600/week property
Say you earn $120,000/year (30% marginal, 32% with Medicare levy) and own an investment property:
Annual numbers
Annual rental income: $31,200 ($600/week)
Loan interest: $32,500 (on $500k loan @ 6.5%)
Council rates + water: $3,200
Landlord insurance: $1,800
Strata: $4,000
Repairs + maintenance: $2,000
Division 40 depreciation: $2,500
Division 43 depreciation: $5,500
Total expenses: $51,500
Gross cash loss (excl depreciation): −$12,300/yr (~$236/wk)
Taxable loss (incl depreciation): −$20,300/yr
Tax benefit at 32% (with Medicare): $6,496
True after-tax cost: $5,804/year ≈ $112/week
That's the headline: the property costs the landlord $112/week out of pocket, not $236. The $124/week delta comes from the tax benefit on the non-cash depreciation. If this property's capital value grows faster than $5,800/yr, it's making money even though it looks like it's bleeding.
A crucial caveat: change the assumptions and the answer moves fast. A 1% interest rate rise takes the cash loss from $12,300 to $17,300. A tenant vacating for 4 weeks costs $2,400 in missed rent. Most Australian landlord calculators don't stress-test the base case — PropAlly's Investor module does.
When negative gearing actually makes sense
Negative gearing isn't a strategy on its own. It's a tax consequence of owning a loss-making property. The strategy only works if:
- •Capital growth exceeds your after-tax holding cost. On the worked example above, the property needs to grow at least $5,800/yr in value just to break even.
- •You can comfortably afford the weekly out-of-pocket number, even with a 2-3% interest rate shock.
- •You have a long enough investment horizon (7-10+ years) for capital growth to compound. Negative gearing a property you need to sell in 18 months is usually a mistake.
- •Your marginal rate is high enough for the tax benefit to matter. Someone in the 16% bracket gets much less leverage than someone at 37% or 45%.
- •The property will eventually become positively geared as rents rise — otherwise you're locked into the cash drain forever.
Five mistakes Australian landlords make with negative gearing
- Not claiming Division 43 depreciation. Every post-1987 build qualifies. On most properties this is $5,000–$15,000/yr in deductions sitting invisible. Get a QS schedule once; use it every year.
- Apportioning rates to the wrong financial year. Councils issue notices quarterly. Only the amount that relates to the current FY is deductible this year — the rest goes next year. Getting this wrong is the #3 audit trigger for rental properties.
- Confusing repairs with improvements. Fixing a broken dishwasher is a repair (fully deductible). Replacing it with a better one is an improvement (depreciated). The ATO distinguishes and so should you.
- Claiming full loan interest when the loan is partly personal. If you redrew $30k of your property loan for a holiday, the interest on that $30k isn't deductible. Mixed-purpose loans need careful apportioning.
- Forgetting that negative gearing only makes sense if the property grows. The tax benefit reduces your holding cost. It doesn't create wealth. Capital growth creates wealth. If a property isn't going to grow, the tax benefit is just putting lipstick on a losing asset.
Frequently asked questions
Is negative gearing still allowed in Australia in 2026?
Yes. As of 2026, negative gearing remains legal and widely used. The rules have not changed materially since the 1985 reintroduction. Any future changes would require Commonwealth legislation. Election cycles sometimes spark debate but current rules apply until changed.
Does negative gearing work if I earn a low income?
Less well than it does for higher earners. A $10,000 loss generates a $1,600 tax benefit at the 16% marginal rate but $4,500 at the 45% rate. If your income is low and likely to stay low, negative gearing is a smaller lever. It's still legal and still works — the benefit is just proportional to your marginal rate.
Can I negative gear a property I live in?
No. Negative gearing only applies to income-producing assets. If you live in a property as your main residence, you can't claim the loss against other income. Partial claims apply if you rent out part of the home (a granny flat, a spare room) — consult your accountant for the apportioning.
Do I need a quantity surveyor to claim depreciation?
Strongly recommended. You can technically estimate Division 43 yourself, but the ATO requires an inspection by a qualified QS for anything beyond trivial cases, and your accountant will usually insist. The one-off cost ($600–$800) pays for itself in the first year of claim. It's tax-deductible.
What's the difference between negative gearing and positive gearing?
Negative gearing = annual expenses exceed rental income (loss). Positive gearing = rental income exceeds expenses (profit). Positively geared properties pay tax on the surplus rather than claim a loss. Neither is inherently better; positive gearing builds cashflow, negative gearing is typically held for capital growth.
How does the Medicare levy affect my calculation?
The Medicare levy (2%) applies on top of income tax for most earners, which effectively adds 2 percentage points to each bracket. A 30% marginal rate becomes 32% effective. Simple negative gearing calculators ignore this; precise ones include it. The difference on a $20,000 loss is $400 — meaningful but not enormous.