Negative gearing is one of the most talked about property investment strategies in Australia. It is also one of the most misunderstood.
You may have heard someone say, "Buy an investment property, claim the loss on tax and let the property grow in value."
That sounds straightforward. But there is an important detail often left out of the conversation.
A negatively geared property is still losing money.
The tax treatment may reduce the financial impact of that loss, but it does not automatically make the investment profitable.
And following the Australian Government's 2026 Federal Budget, the tax treatment of rental losses is changing for certain residential investment properties.
That means the rules applying to someone who already owns an investment property may be different from those applying to someone buying an established property today.
This guide explains how negative gearing works, the changes announced in the 2026 Budget, and what an investment property can mean for your home loan and future borrowing capacity.
The 2026 Federal Budget introduced reforms affecting negative gearing and capital gains tax. Key changes are scheduled to commence from 1 July 2027, with transitional arrangements based on when properties were acquired.
This article explains the announced reforms at a general level. Your accountant should confirm the legislation and its application to your circumstances before you make an investment decision.
What Is Negative Gearing in Australia?
Negative gearing occurs when the deductible costs associated with an income-producing investment exceed the income generated by that investment.
In property investment, this usually means the rental income is less than the relevant deductible expenses.
For example, imagine a property earns $30,000 in annual rent.
If its deductible expenses total $42,000, it has a net rental loss of $12,000.
Under the traditional negative gearing rules, an eligible individual could generally offset that rental loss against other assessable income, such as salary or wages.
The resulting reduction in taxable income may reduce the amount of income tax payable.
However, this treatment is changing for certain established residential properties under the 2026 Budget reforms.
Negative gearing vs positive gearing
Negatively Geared
The property's relevant deductible expenses exceed its rental income, creating a net rental loss.
Positively Geared
The property's rental income exceeds its relevant deductible expenses, producing a net rental profit.
It is also important to distinguish taxable profit from actual cash flow.
A property can have positive taxable income while requiring cash contributions because principal repayments are not tax deductions.
Similarly, depreciation may reduce taxable income without creating an equivalent cash payment in that year.
How Does Negative Gearing Actually Work?
The basic calculation starts with rental income and the expenses that may be deductible under Australian tax law.
Common expense categories can include:
- Interest on eligible investment borrowings.
- Property management fees.
- Council and water rates.
- Landlord insurance.
- Eligible repairs and maintenance.
- Body corporate or strata expenses, where deductible.
- Eligible capital works and depreciation deductions.
Not every property-related payment is immediately tax deductible.
For example, principal repayments on a mortgage are generally not deductible. Some capital expenditure may need to be treated differently from ordinary repairs and maintenance.
Interest deductibility also depends on the use of borrowed funds, not simply which property secures the loan.
Your accountant should determine which expenses are deductible and how they must be treated.
A Simple Negative Gearing Calculation
| Annual Item | Amount |
|---|---|
| Rental income | $30,000 |
| Loan interest | $35,000 |
| Property management | $2,000 |
| Rates and insurance | $3,000 |
| Eligible repairs and other expenses | $2,000 |
| Total expenses | $42,000 |
| Net rental loss | -$12,000 |
The property produces a $12,000 annual loss before considering any tax benefit.
Whether that loss can reduce other taxable income depends on the applicable tax rules and the investor's circumstances.
Illustrative example only. Expenses are assumed deductible for demonstration. Actual tax treatment must be confirmed by a registered tax agent.
What Changed to Negative Gearing in the 2026 Federal Budget?
The 2026 Federal Budget announced a significant change to how losses from residential investment properties will be treated.
From 1 July 2027, the ability to offset rental losses against salary and other unrelated income will generally be restricted to eligible newly built residential properties and investments covered by transitional or exemption rules.
The key date for existing investments is 7:30 pm AEST on 12 May 2026, when the Budget was announced.
How the changes affect different investors
| Property Situation | General Treatment Under the Reforms |
|---|---|
| Acquired before 7:30 pm AEST, 12 May 2026 | Existing negative gearing treatment is preserved under grandfathering arrangements, subject to applicable rules. |
| Eligible newly built residential property | Qualifying rental losses may continue to offset other assessable income. |
| Established residential property acquired after Budget night | From 1 July 2027, qualifying rental losses generally cannot be offset against salary or unrelated income. Restrictions and carry-forward rules apply. |
| Established property acquired between Budget night and 30 June 2027 | Transitional treatment may allow existing negative gearing deductions before the new rules commence. |
For affected established residential properties, the reforms generally allow qualifying losses to be applied against eligible residential property income, with unused amounts carried forward under the relevant rules.
The detailed treatment of carried-forward losses, capital gains, ownership changes and exceptions requires professional tax advice.
For the Government's explanation, see the 2026–27 Federal Budget tax reform summary .
What if You Already Owned an Investment Property Before the Budget?
The reforms include grandfathering arrangements for eligible residential investment properties acquired before the Budget night cutoff.
This means existing investors are generally able to retain the previous negative gearing treatment for those qualifying investments.
For example, someone who purchased an investment property in 2022 may continue to receive the existing treatment for eligible rental losses, subject to the applicable law.
However, it is important not to assume that grandfathering automatically extends to every future transaction involving that property.
Ownership transfers, restructuring, relationship breakdowns, inheritance and other changes can raise specific tax questions.
These should be reviewed with an accountant before any transaction takes place.
What Happens if You Buy an Established Investment Property After the 2026 Budget?
This is one of the most important changes for prospective investors.
An established residential investment property purchased after the Budget night cutoff may still generate a rental loss.
But from 1 July 2027, that loss generally cannot be used to reduce unrelated income such as wages.
Instead, the new rules restrict how qualifying rental losses may be used, including provisions for carrying unused losses forward.
Why this matters to cash flow
Consider an investor with a property generating a $12,000 annual rental loss.
Under the traditional rules, an eligible investor may receive a current-year tax benefit because the loss reduces their taxable income.
Under the new restricted treatment, an affected investor may not receive that same immediate benefit against salary income.
The property may therefore require more cash from the investor in the short term.
The loss may retain a future tax value under the carry-forward rules, but that is different from receiving a tax benefit in the current year.
The Budget reforms do not mean that all expenses associated with established investment properties suddenly stop being deductible.
The central change is how qualifying rental losses may be used against different categories of income. Your accountant should confirm the applicable treatment.
Are Newly Built Investment Properties Exempt From the Negative Gearing Changes?
The Government has retained negative gearing treatment for eligible newly built residential properties as part of its policy to encourage housing supply.
Qualifying investors may continue to offset eligible rental losses against other assessable income.
However, not every newly renovated or rebuilt property necessarily qualifies.
Eligibility depends on the specific requirements of the legislation.
For example, a substantial renovation or knockdown rebuild that does not increase housing supply may not satisfy the relevant criteria.
Before entering a contract, the investor should obtain tax advice confirming whether the proposed property qualifies.
Does this mean new builds are better investments?
Not necessarily.
Tax treatment is only one part of an investment decision.
A new property can still be overpriced, experience weak rental demand or deliver poor capital growth.
It may also involve construction delays, valuation shortfalls or unexpected costs.
An investment should not be assessed solely on whether its losses are tax deductible.
Worked Example: How the New Rules Could Change the Outcome
Let us compare two hypothetical investors with identical property income and expenses.
One owns a qualifying property covered by the existing negative gearing rules.
The other owns an established property subject to the new restricted treatment from 1 July 2027.
Annual Property Position
| Item | Amount |
|---|---|
| Annual rent | $30,000 |
| Eligible interest and other expenses | $42,000 |
| Annual rental loss | -$12,000 |
Investor A: Existing Negative Gearing Treatment
Assume the full $12,000 loss is eligible to offset other income.
If the investor's relevant marginal tax rate is 39%, including Medicare levy, the illustrative tax reduction would be:
$12,000 × 39% = $4,680
The remaining economic loss, before considering other adjustments, would be:
$12,000 - $4,680 = $7,320
Investor B: Restricted Treatment
Assume the investor has no other eligible residential property income or gains against which the loss can be applied in the year.
Under the new rules, the $12,000 loss would generally not reduce salary income in that year.
The investor would still need to fund the property's cash shortfall.
The qualifying unused loss may be carried forward under the applicable rules.
| Comparison | Investor A | Investor B |
|---|---|---|
| Rental loss | $12,000 | $12,000 |
| Illustrative immediate tax reduction against salary | $4,680 | $0 |
| Illustrative current-year loss after this tax effect | $7,320 | $12,000 |
| Potential future treatment of unused losses | Not applicable to this example | Subject to carry-forward rules |
Simplified illustration only. Assumes the same rental loss, a constant marginal tax rate, full deductibility for Investor A, and no eligible offsetting residential property income for Investor B. It excludes tax offsets, changes in marginal brackets, timing differences, principal repayments and other personal tax circumstances. It is not a tax calculation for an individual.
The important lesson is not that one investment is necessarily better.
It is that the same property loss can produce different current-year tax outcomes depending on the applicable rules.
Why Negative Gearing Does Not Mean the Property Pays for Itself
One of the most misleading statements in property investment marketing is that a negatively geared property pays for itself at tax time.
That is not how it works.
If a property makes a loss, the investor has still made a loss.
Where the rules allow a tax deduction against other income, the tax saving may reduce the financial impact.
It does not reimburse the entire loss.
The tax benefit depends on your circumstances
Two investors with the same deductible loss may receive different tax outcomes because of their income, marginal tax rates and other circumstances.
For example, a $10,000 eligible deduction may have a different tax effect for someone earning $80,000 compared with someone earning $200,000.
The calculation may also change if the deduction crosses tax brackets or affects other tax obligations or entitlements.
A registered tax agent should calculate the actual tax effect.
What about depreciation?
Depreciation and capital works deductions may affect the property's taxable result.
However, eligibility depends on the property, assets, construction history and relevant tax rules.
A depreciation deduction is not the same as receiving cash from a tenant.
That is why a property investment should be examined using both taxable income and actual cash flow.
What About the 2026 Changes to Capital Gains Tax?
Negative gearing is only one part of the tax treatment of investment property.
Capital gains tax may also be relevant when the property is sold.
The 2026 Federal Budget announced changes to the existing 50% CGT discount arrangements.
From 1 July 2027, the reforms introduce an inflation-adjusted approach and a minimum 30% tax on relevant capital gains, subject to the detailed rules and exceptions.
The Government has also announced transitional treatment for gains arising before commencement, and alternative arrangements for eligible new builds.
This means the purchase date, asset type, holding period and timing of capital growth can all be relevant.
Investors should not assume that the previous 50% discount will apply unchanged to every future capital gain.
The official Budget material provides further detail in the Negative Gearing and Capital Gains Tax Reform explainer .
Capital gains tax can be affected by cost base adjustments, ownership structures, exemptions, losses, holding periods and transitional rules.
Triple O Finance does not calculate or advise on capital gains tax. An accountant or qualified tax adviser should review your circumstances.
The Cash Flow Problem Many Property Investors Overlook
A property can look manageable on paper and still place pressure on household cash flow.
Consider a property with weekly rent of $650.
That is $33,800 per year before vacancy and expenses.
Now assume the investment loan is $650,000 at an illustrative 6.5% interest rate.
Interest alone would be approximately $42,250 per year if the balance and rate remained unchanged.
That is already more than the annual rent, before management fees, insurance, rates, repairs or vacancy.
Illustrative Interest-Only Cash Flow
| Annual Item | Amount |
|---|---|
| Gross rent: $650 per week | $33,800 |
| Loan interest at 6.5% | -$42,250 |
| Other cash property expenses | -$6,000 |
| Annual cash shortfall | -$14,450 |
| Weekly equivalent | About -$278 |
This example excludes principal repayments, unexpected repairs and any tax benefit.
A principal and interest loan would require additional cash repayments, although the principal component reduces the loan balance.
What happens if interest rates rise?
On a $650,000 interest-only loan, a one percentage point increase in interest rate would add approximately $6,500 per year in interest, assuming the balance remained unchanged.
That is around $125 per week.
Vacancy, repairs and insurance increases can also widen the shortfall.
Before taking on an investment loan, it is important to understand how the repayments would affect your household budget under less favourable conditions.
How Do Banks Assess Rental Income From Investment Properties?
This is where negative gearing becomes directly relevant to mortgage lending.
A lender does not necessarily treat the full rental income as available to service a loan.
Many lenders apply a rental income adjustment, sometimes called rental shading, to allow for potential vacancy and property expenses.
The percentage used varies between lenders and may depend on the property and circumstances.
Example: Rental income assessment
Suppose a property is expected to generate $700 per week in rent.
That equals $36,400 per year in gross rent.
If a lender assesses 80% of the rent for servicing purposes, the amount recognised would be $29,120 per year.
| Rental Assessment | Amount |
|---|---|
| Gross weekly rent | $700 |
| Gross annual rent | $36,400 |
| Illustrative lender recognition | 80% |
| Assessed annual rent | $29,120 |
This does not mean the lender expects you to receive only 80% of the rent.
It is a servicing assumption used in the credit assessment.
Lenders also assess existing and proposed loan repayments, often using an assessment rate above the actual interest rate.
Other expenses and commitments may also be included under the lender's policy.
Do lenders include negative gearing tax benefits?
Some lenders may recognise certain tax effects when assessing borrowing capacity, subject to their policy and the relevant tax treatment.
Others may use different methods or may not recognise a particular benefit.
The 2026 reforms make it especially important not to assume that a tax benefit previously recognised for one investment will apply to every new purchase.
Any lender treatment must reflect its current credit policy and the borrower's actual circumstances.
How Can an Investment Property Affect Your Next Home Loan?
One of the most overlooked considerations is how an investment property can affect your future borrowing capacity.
You may be comfortable funding the investment property today.
But what happens if you want to buy another property in two years?
Or upgrade your family home?
Or refinance existing debts?
The lender will generally consider your existing investment loans alongside your other liabilities.
Rental income may help, but it may not fully offset the assessed loan commitments.
Why your borrowing capacity can reduce
Consider someone who buys an investment property with a substantial mortgage.
When they later apply for another loan, the lender may assess:
- The investment loan repayments at its assessment rate.
- Only an accepted portion of the rental income.
- Existing personal and household expenses.
- Other loans and credit commitments.
- Any additional costs recognised under its policy.
The investment property may therefore reduce the amount available for a future purchase.
This is why it can be useful to model both the proposed investment loan and a possible future home loan before committing.
If you are planning to purchase your first home while considering investment options, our guide to first home buyer schemes, grants and concessions explains assistance that may be available to eligible buyers.
Eligibility for government assistance depends on the specific scheme rules and your circumstances.
Does the Structure of Your Investment Loan Matter?
Yes, loan structure can affect cash flow, repayment obligations and flexibility.
However, loan structure should not be selected solely for a perceived tax advantage.
Principal and interest vs interest only
With a principal and interest loan, repayments reduce the outstanding loan balance over time.
With an interest-only loan, scheduled repayments generally cover interest during the interest-only period, subject to the loan terms.
Interest-only repayments may be lower during that period, but the principal is not reduced through scheduled repayments.
When the interest-only period ends, repayments may increase because the principal must be repaid over the remaining term.
Interest-only loans may also have different rates and eligibility requirements.
Offset accounts and redraw
Offset accounts and redraw facilities can affect how interest is calculated and how funds are accessed.
However, their tax implications can differ.
For example, withdrawing funds from a loan for private purposes may affect the deductibility of subsequent interest.
The security property alone does not determine whether interest is tax deductible.
The use of the borrowed funds is an important consideration.
A registered tax agent should advise on the tax consequences before loan funds are redrawn or restructured.
What about refinancing an investment loan?
Refinancing may change the interest rate, repayments, loan features or available equity.
It can also involve fees, valuation requirements and a new credit assessment.
If you already own an investment property, our home loan refinancing page explains how the refinancing process works.
Tax consequences of refinancing or changing the use of borrowed funds should be reviewed separately with an accountant.
What Are the Risks of Relying on Negative Gearing?
Negative gearing is sometimes discussed as though it were an investment strategy on its own.
In reality, it describes a financial and tax position.
The investment still needs to be assessed on its underlying merits and risks.
1. Capital growth is not guaranteed
A property that makes ongoing rental losses may depend on future capital growth to produce a satisfactory overall return.
Property values can stagnate or fall.
There is no guarantee that future growth will compensate for holding costs, transaction costs or taxes.
2. The cash shortfall can increase
Interest rates, insurance, maintenance, strata fees and other costs can rise.
Rental income may not increase at the same rate.
Periods without a tenant can also affect cash flow.
3. Tax treatment can change
The 2026 Budget reforms demonstrate that tax rules can change over time.
An investment should not depend entirely on a particular tax concession remaining available.
4. Borrowing capacity may be affected
An investment loan can reduce your ability to borrow for other purposes.
That may matter if your personal circumstances change or you want to purchase another property.
5. Selling can involve substantial costs
Selling a property may involve agent fees, legal costs, loan discharge costs and potential tax consequences.
A property may need to achieve meaningful growth before those costs are recovered.
Questions Worth Asking Before Buying an Investment Property
Before committing to an investment property, consider the following questions.
- Can I afford the shortfall? Could you manage the repayments if the property were vacant, interest rates increased or unexpected repairs were required?
- How will this affect my next purchase? Would the investment loan limit your ability to buy or upgrade your own home?
- What tax rules apply to this property? Is the property covered by grandfathering, new-build treatment or the restricted rules for established housing?
- Has my accountant reviewed the numbers? Do the projections reflect your actual income, deductions, ownership structure and tax circumstances?
- What happens if property prices do not rise? Can the investment remain manageable without relying on strong capital growth?
- Who is recommending the investment? Does the person promoting the property receive a commission, referral fee or other benefit from the transaction?
- Have I compared the lending options? Do the loan structure, interest rate, features and repayment requirements suit my borrowing circumstances?
These questions do not determine whether a property is a suitable investment.
They help identify issues that should be discussed with the appropriate qualified professionals before making a commitment.
Official Resources on Negative Gearing and the 2026 Budget
For further information, the following government resources explain the announced reforms and general rental property tax rules.
- Australian Government: 2026–27 Budget Tax Reform
- Treasury: Negative Gearing and Capital Gains Tax Reform Explainer
- Australian Taxation Office: Residential Rental Properties
- ASIC Moneysmart: Property Investment
Because these reforms involve transitional provisions and exceptions, the latest legislation and ATO guidance should be checked with a registered tax agent before relying on any specific treatment.
How Triple O Finance Can Help With Investment Property Lending
At Triple O Finance, our role is to help borrowers understand their home loan options and how lenders assess investment property finance.
We can assist with:
- Comparing suitable investment loan options.
- Explaining how lenders assess rental income.
- Assessing borrowing capacity under lender policy.
- Comparing principal and interest and interest-only repayment options.
- Reviewing loan features such as offset accounts.
- Understanding how an investment loan may affect future borrowing capacity.
- Exploring refinancing options for existing investment loans.
We do not advise on whether an investment property is suitable for you, whether negative gearing is beneficial for your tax position, or whether a particular property will increase in value.
Those matters should be discussed with an appropriately qualified accountant, tax adviser or licensed financial adviser.
Considering an Investment Property Loan?
Before committing to a property, understand how the proposed loan may affect your repayments, cash flow and future borrowing capacity.
We can help you compare relevant lender policies and understand your finance options, while your accountant advises on the tax implications.
Get a Free Assessment
Written by Nishant Ramavat
Founder, Director & Senior Finance Specialist
Triple O Finance
Nishant is the Founder, Director and Senior Finance Specialist at Triple O Finance. A former NSW Police Officer, he has worked in finance broking since establishing the business in 2018.
He helps Australian borrowers, including emergency services professionals and property investors, understand lender policies, borrowing capacity and mortgage options.
