This article provides general information only and does not constitute personal financial advice. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider whether it is appropriate for you and seek advice from a licensed financial adviser if necessary.

What Is Negative Gearing?

Negative gearing occurs when the expenses of owning an investment property (mortgage interest, rates, insurance, maintenance, property management fees) exceed the rental income it generates. The net loss can be deducted against your other taxable income, reducing your overall tax liability. This strategy has been a cornerstone of Australian property investment for decades, encouraged by tax settings that allow investors to offset rental losses against salary, business income, or other sources.

According to the Australian Taxation Office, negative gearing is not unique to property. It applies to any investment where costs exceed returns, including share portfolios funded by borrowed money (ATO, 2026). However, property remains the most common application due to the scale of borrowing involved and the expectation that capital growth will eventually outweigh the annual losses.

How Negative Gearing Works

Imagine you purchase an investment property for $700,000 with a mortgage of $560,000 (80% loan-to-value ratio). Your annual rental income is $28,000, but your costs total $36,000: mortgage interest ($25,200 at 4.5%), council rates ($2,000), insurance ($1,200), property management ($2,240), repairs ($3,000), and depreciation ($2,360). The annual shortfall is $8,000.

If your marginal tax rate is 37% (plus 2% Medicare levy), that $8,000 loss reduces your taxable income, saving you approximately $3,120 in tax. Your true out-of-pocket cost drops to $4,880 per year. The strategy assumes that over time, rental income will rise, and the property will appreciate in value. When you eventually sell, the capital gain (less the 50% CGT discount for assets held over 12 months) should exceed the cumulative losses and deliver a net profit.

The Case For Negative Gearing in 2026

Negative gearing still makes sense for investors in specific circumstances. First, if you are on a higher marginal tax rate (37%, 45%, or the 47% top rate including Medicare levy), the tax benefit is more substantial. A $10,000 rental loss saves a 45% taxpayer $4,700, compared to $2,100 for someone on the 21% bracket (as covered in Principles of Finance).

Second, in markets where strong capital growth is likely, short-term cashflow losses may be tolerable. Coastal metro markets with constrained supply, infrastructure investment, or population growth have historically delivered long-term appreciation that justifies years of negative cashflow. ASIC MoneySmart notes that property investment carries risks, including periods of low or negative growth, vacancy, and rising interest rates (MoneySmart, 2026).

Third, recent policy settings remain investor-friendly. No legislative changes to negative gearing were enacted in 2025 or early 2026, despite periodic political debate. Investors still enjoy full deductibility of interest and expenses, and the 50% CGT discount for assets held longer than 12 months remains in place (as of July 2026; verify current rules at ato.gov.au).

The Case Against Negative Gearing in 2026

The strategy has significant downsides. Most critically, you are losing money each year in the hope of future gains. If the property does not appreciate as expected, or if vacancy rates rise, or if interest rates climb further, the cumulative losses can become unsustainable. Borrowing costs remain elevated in mid-2026 compared to the 2020-2021 lows, with variable mortgage rates for investment properties sitting around 6.5% to 7.0% at many lenders. Higher rates widen the gap between rental income and expenses.

Read also: Australian Property Market Outlook for the Second Half of 2026

Second, negative gearing does not create wealth on its own. It amplifies outcomes: if the property rises in value, leverage magnifies your return, but if it falls or stagnates, you bear the full loss plus the cashflow drain. Investors who stretched to buy during peak prices in 2021-2022 have faced flat or declining valuations in some markets, turning a planned short-term loss into a prolonged one.

Third, the tax benefit is not a profit. Saving $3,000 in tax on an $8,000 loss still means you are $5,000 worse off that year. The strategy only works if capital growth eventually offsets the accumulated shortfall. For properties in oversupplied markets or areas with weak employment and demographic trends, that growth may never arrive.

Finally, opportunity cost matters. Money committed to covering a negatively geared property could instead fund positively geared assets (term deposits, shares with franked dividends, high-yield savings accounts) or reduce non-deductible debt (such as your home mortgage or HECS/HELP debt).

When Does Negative Gearing Make Sense?

Negative gearing is not inherently good or bad. It is a tool suited to certain investor profiles. It makes sense if you have a stable, high income; can comfortably absorb annual cashflow losses without financial stress; have a long investment horizon (at least 7 to 10 years); are investing in a property with strong fundamentals (location, infrastructure, scarcity); and understand that tax savings are not the same as profit.

It does not make sense if you are relying on the tax refund to cover living expenses, cannot afford rising interest rates or prolonged vacancy, are buying purely for tax reasons without evaluating the property’s growth potential, or are investing in an oversupplied or declining market.

What Has Changed?

Since 2020, borrowing costs have risen sharply. The RBA cash rate climbed from 0.1% in 2021 to a peak of 4.35% in late 2023, and while it has eased slightly to around 4.0% in mid-2026, investment loan rates remain well above historic lows. Rental yields in metro markets remain compressed, typically 3% to 4% gross, meaning larger gaps between income and expenses.

Regulatory scrutiny has also increased. APRA lending standards require borrowers to demonstrate genuine savings capacity at higher serviceability buffers, making it harder to qualify for large investment loans. Rental reforms in several states have strengthened tenant protections, potentially affecting vacancy risk and landlord obligations.

Conclusion

Negative gearing remains a legitimate strategy in 2026, but it is not a shortcut to wealth. It suits disciplined, high-income investors with strong cashflow buffers and a focus on long-term capital growth in carefully selected markets. The tax benefit is real, but the annual loss is also real. Before committing, model your scenarios at higher interest rates, factor in vacancy and maintenance costs, and evaluate whether the property itself, independent of tax treatment, is a sound investment. Consult a licensed financial adviser and a registered tax agent to assess whether negative gearing aligns with your financial position and goals. Remember, rates and tax rules are subject to change; verify current settings at ato.gov.au before making decisions.