Negative gearing is the subject of more political debate in Australia than almost any other tax provision. That debate often obscures a simple, practical question that property investors actually need answered: how does it work, and is it relevant to my situation?
This guide covers the mechanics. How a negatively geared property reduces your tax bill, which costs are included in the calculation, what the ATO scrutinises in 2025-26, and what the long-term investment rationale looks like.
What Negative Gearing Means
Negative gearing occurs when the deductible costs of owning an investment property exceed the rental income it generates. The resulting loss is offset against the investor's other assessable income — including salary — which reduces total taxable income and produces a tax saving.
It is not a loophole. It is a standard application of Australian income tax law. Any taxpayer earning assessable income can deduct the legitimate costs of earning that income. A rental property investor is subject to the same rules as any other business that incurs a loss in a given year.
A Worked Example
Consider an investor with $100,000 in salary income who owns a rental property that generates $28,000 per year in rent. Total deductible expenses — loan interest, property management fees, council rates, insurance, repairs, and depreciation — amount to $42,000.
The property is negatively geared by $14,000. Taxable income falls from $100,000 to $86,000. At the 32.5 per cent marginal rate, the tax saving is approximately $4,550. The investor's net out-of-pocket cost for holding the property is $14,000 minus $4,550 — around $9,450 per year.
Which Costs Are Included in the Negative Gearing Calculation?
- Loan interest (typically the largest single deduction)
- Property management fees and letting agent commissions
- Council rates, water charges, and land tax
- Landlord insurance and building insurance
- Repairs and maintenance
- Depreciation on the building structure and plant and equipment
- Body corporate fees and strata levies
- Tax agent fees related to the investment property
Depreciation is the item most investors underestimate. A properly prepared tax depreciation schedule from a qualified quantity surveyor can add thousands of dollars to annual deductions without any additional cash outlay.
Does the ATO Scrutinise Negative Gearing Claims?
The ATO does not penalise the strategy. What it investigates is whether the expenses being claimed are legitimate, whether the property was genuinely available for rent at a commercial rate, and whether the rental income declared matches what the property manager has reported.
For 2025-26, the ATO is cross-referencing 2.3 million property management records spanning 2018 to 2026. Investors who declare less rental income than their property manager's records show, or who claim costs for periods when the property was privately used, are likely to receive a review notice.
Holiday Homes and the 2025-26 Rule Change
A material update took effect from 12 November 2025, with a transitional period running to 1 July 2026. The ATO's revised guidance on holiday homes requires an objective analysis of whether a property is genuinely available for rent at a commercial rate throughout the period for which deductions are claimed.
A property that is listed for rent but only available when it suits the owner's personal schedule, or that is occupied by family or friends at below-market rates, does not qualify for full deductions during those periods. Draft ATO guidance (PCG 2025/D7) sets out both time-based and area-based apportionment methods for properties with mixed personal and rental use. Your accountant can advise which method produces the correct outcome for your property.
The Long-Term Investment Rationale
Most investors do not hold negatively geared properties solely for the annual tax saving. The tax benefit reduces the holding cost of the asset while the investor waits for capital growth. When the property is eventually sold, the gain is taxed at the investor's marginal rate, but assets held for more than 12 months attract a 50 per cent capital gains tax (CGT) discount. Only half the gain is included in taxable income.
The combination of negative gearing reducing the annual holding cost and the CGT discount reducing the eventual tax on sale is the foundation of most long-term Australian property investment strategies.
What to Bring to Your Accountant
- The property manager's annual income and expense statement
- Your existing depreciation schedule, or the construction date of the property if you do not have one
- Loan statements showing interest charged during the year
- Invoices for any repairs, maintenance, or capital work
- Records of any periods of private use during the year
P&D Accountants prepares rental property schedules for investors across Australia. We review every deduction category, apply the correct ATO rules, verify your depreciation schedule, and ensure your return is consistent with what the ATO's data matching program expects to see.
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Explore Property Investor ServicesFrequently asked questions
What is the difference between negative gearing and positive gearing?
A property is negatively geared when deductible expenses exceed rental income, producing a tax-deductible loss. A property is positively geared when rental income exceeds all expenses, producing taxable profit. Most Australian residential investment properties are negatively geared, particularly in the early years when interest costs are highest relative to income.
Can I negatively gear shares?
Yes. Negative gearing is not limited to property. If you borrow money to purchase income-producing investments such as shares or managed funds, and the interest on that loan exceeds the income generated, the resulting loss is deductible against your other income.
Does negative gearing change if the property becomes positively geared?
Once the property transitions to positive gearing — typically as rents rise relative to a fixed loan balance — the surplus income becomes taxable at your marginal rate. Many investors plan for this shift as part of their long-term investment strategy.
What records do I need to substantiate a negative gearing claim?
You need the property manager's annual statement, loan statements, depreciation schedule, and invoices for all expenses claimed. For properties with any period of private use, you also need records documenting which periods were available for rent at a market rate.