Negative Gearing in Australia 2026 — Real After-Tax Cost

Last updated: May 2026

Negative gearing is one of the most talked-about strategies in Australian property investment — and one of the most misunderstood. At its core, it is straightforward: your investment property costs more to hold than it earns in rent, and the ATO allows you to deduct that loss against your other taxable income. The real question is not whether negative gearing saves you money. It does. The real question is how much it saves you — and whether the after-tax cost is manageable while you wait for capital growth.

This guide works through the 2025–26 ATO tax brackets, the Medicare levy, depreciation (Div 43 and Div 40), and real dollar worked examples so you can see exactly what a negatively geared property costs out of pocket every week.

See your numbers instantly: Negative Gearing Calculator

Table of Contents

1. How Negative Gearing Actually Works
2. 2025–26 ATO Tax Brackets and Medicare Levy
3. Worked Examples — After-Tax Weekly Cost
4. Depreciation: The Silent Deduction (Div 43 + Div 40)
5. Positive Gearing vs Negative Gearing — Which Is Better?
6. The Risk: Relying on Capital Growth
7. Important 2026 Policy Change — What Investors Need to Know
8. Frequently Asked Questions

How Negative Gearing Actually Works

Disclaimer: All figures in this guide are general estimates based on 2025–26 ATO tax rates and publicly available data current as at May 2026. Individual tax outcomes vary based on personal circumstances, deductible expenses, and depreciation schedules. This is general information only — not tax advice. Consult a registered tax agent before making investment decisions.

Key takeaways:

• Negative gearing occurs when rental expenses exceed rental income, creating a tax offset — a deductible loss against your salary or other income.
• Your real cash saving equals the loss multiplied by your marginal tax rate (including the 2% Medicare levy).
• The higher your income, the larger the tax saving — and the lower your after-tax weekly holding cost.
• Negative gearing is a cash-flow deferral strategy, not a cash-flow positive strategy. You still top up the mortgage from your own pocket every week.
• The entire model depends on capital growth eventually turning the investment profitable.

When a property is negatively geared, the rental income falls short of the interest, rates, insurance, property management fees, and maintenance costs you incur. Under Section 8-1 of the Income Tax Assessment Act 1997, genuine investment losses are deductible against all assessable income. Your employer does not know about this deduction — it flows through your annual tax return, producing a refund or reduced tax liability.

The ATO also allows investors to submit a PAYG withholding variation (formerly called a Section 15-15 variation) to reduce the tax withheld from their salary throughout the year, rather than waiting for a lump-sum refund at tax time. This can meaningfully improve weekly cash flow.

Negative gearing vs positive gearing: A property is positively geared when rental income exceeds holding costs — generating a cash surplus. Positive gearing requires a larger deposit or lower borrowing relative to rent, and the surplus is taxable income. Most Sydney and Melbourne investors accept negative gearing in the near term with the expectation that rental yield plus capital growth will outperform the after-tax holding cost over a 7–10 year horizon.

2025–26 ATO Tax Brackets and Medicare Levy

The Stage 3 tax cuts took effect from 1 July 2024 and carry through the 2025–26 financial year. The brackets, effective from 1 July 2025, are:

The Medicare levy is 2% of taxable income (for most taxpayers — a low-income threshold applies below approximately $26,000). This is separate from the tax brackets but is always included in the effective rate calculation for negative gearing purposes.

Effective marginal rates for negative gearing calculations:

The practical implication: a rental loss of $13,200 saves $2,376 in tax for someone earning $50,000, but saves $6,204 for someone earning $200,000. Negative gearing is disproportionately valuable at higher income levels.

Worked Examples — After-Tax Weekly Cost

The following examples use a consistent property: purchase price $700,000, 80% LVR loan of $560,000, interest rate 6.5% per annum, weekly rent of $600 ($31,200 annually).

Annual holding costs:

Example 1 — $100,000 salary earner (37% bracket, 39% effective)

At $100,000 taxable income, you sit in the $45,001–$135,000 bracket. Your marginal rate is 30% but when the 2% Medicare levy is included, the effective marginal rate is 32%.

Wait — at $100,000, you are still in the 30% bracket (not 37%). Let's be precise:

• Marginal tax rate: 30%
• Medicare levy: 2%
• Effective rate: 32%
• Tax saving on $13,200 loss: $13,200 × 32% = $4,224
• After-tax annual cost: $13,200 – $4,224 = $8,976/year
• After-tax weekly cost: ~$173/week

Example 2 — $150,000 salary earner (37% bracket, 39% effective)

At $150,000 taxable income (in the $135,001–$190,000 bracket):

• Marginal tax rate: 37%
• Medicare levy: 2%
• Effective rate: 39%
• Tax saving on $13,200 loss: $13,200 × 39% = $5,148
• After-tax annual cost: $13,200 – $5,148 = $8,052/year
• After-tax weekly cost: ~$155/week

Example 3 — $200,000+ salary earner (45% bracket, 47% effective)

At $200,000 taxable income (in the $190,001+ bracket):

• Marginal tax rate: 45%
• Medicare levy: 2%
• Effective rate: 47%
• Tax saving on $13,200 loss: $13,200 × 47% = $6,204
• After-tax annual cost: $13,200 – $6,204 = $6,996/year
• After-tax weekly cost: ~$135/week

Summary comparison table

These figures do not yet include depreciation deductions, which can materially reduce the after-tax cost further. See Depreciation: The Silent Deduction below.

Use the Negative Gearing Calculator to model your own income level, loan amount, and rental income in real time.

Depreciation: The Silent Deduction (Div 43 + Div 40)

Depreciation is a non-cash deduction — you do not spend money to claim it, but it reduces your taxable rental income (or deepens your rental loss). There are two types under the tax law.

Division 43 — Capital Works (Building Depreciation)

Div 43 covers the structural elements of the building: walls, floors, roof, fixed carpet, internal fittings. Post-1987 residential construction depreciates at 2.5% per year over 40 years.

On a $700,000 property where the building value (excluding land) is estimated at $350,000:

• Annual Div 43 deduction: $350,000 × 2.5% = $8,750/year

This is a significant non-cash deduction. Added to the existing $13,200 cash loss, the total deductible loss becomes $21,950/year.

Important caveat: Every dollar of Div 43 deductions claimed reduces your cost base for CGT purposes. This means the CGT saving at sale is deferred — not eliminated. Div 43 essentially converts a future capital gain into current deductions. This can still be advantageous depending on your tax rate at sale and timing.

Division 40 — Plant and Equipment

Div 40 covers depreciable assets within the property: hot water system, air conditioner, dishwasher, carpet (as a separate item), blinds, oven. Each item has an effective life set by the ATO and depreciates at either the diminishing value method or prime cost.

For properties purchased after 9 May 2017, Division 40 deductions are only available for new items you install — not second-hand items that were already in the property at purchase. A brand-new investment property (or one you have substantially refurbished) will generate stronger Div 40 deductions than an established property purchased with existing fittings.

A typical new-build investment property might generate $3,000–$6,000/year in Div 40 deductions in the first five years.

Combined depreciation impact (new build example):

At a 39% effective rate, this total loss creates a tax saving of $10,120/year — reducing the after-tax cash cost to just $3,080/year ($59/week) before principal repayment.

A quantity surveyor prepares a depreciation schedule (tax depreciation report) that itemises every deductible amount. The report is one-off and typically costs $500–$800. It is itself a tax-deductible expense for investment properties.

Positive Gearing vs Negative Gearing — Which Is Better?

Neither strategy is universally superior. The right choice depends on your income, tax position, cash flow needs, and investment time horizon.

Positive gearing is appropriate when:

• You are retired or on a lower income and need cash flow
• You have high existing debt and cannot afford weekly top-ups
• You prefer a self-funding portfolio that does not depend on a wage

Negative gearing is appropriate when:

• You are a high-income earner in the 37% or 45% bracket
• You can comfortably fund the weekly top-up from salary
• You believe the capital growth of the asset will significantly outperform the after-tax holding cost
• You want to reduce your current-year income tax burden

The decision is not binary. Many experienced investors hold a mix — negatively geared growth properties in capital cities alongside positively geared regional or commercial properties that generate cash flow.

Check your property's potential return with the Investment Property Yield Calculator and the Property Growth Calculator to model both the income and capital sides of the equation.

The Risk: Relying on Capital Growth

The fundamental premise of negative gearing is this: you accept a cash-flow deficit now in exchange for capital growth later. Every week you top up the mortgage is a bet that the property's value will increase enough to justify the cost.

When the model works:

A $700,000 property growing at 7% per annum gains $49,000 in value in year one — well above the after-tax holding cost. Over 10 years, the compounding effect on a leveraged $140,000 deposit can be substantial. RBA data on housing asset prices provides long-run benchmarks.

When the model fails:

• Capital growth stalls or reverses. In flat markets you are paying weekly top-ups with no appreciation to offset them.
• Rising interest rates. Each 0.25% rate rise adds approximately $1,400/year to holding costs on a $560,000 loan.
• Extended vacancy. Two months of vacancy wipes approximately $5,200 in rent — exceeding most investors' annual tax saving.
• Land tax. NSW, Victoria, and Queensland all levy land tax on investment properties above state-specific thresholds. Land tax is not deductible against wages and adds directly to holding costs.

The most dangerous assumption is treating the tax saving as "profit." At best, you recover 47c in the dollar from the ATO. The remaining 53c comes out of your own pocket regardless.

Stress-test before you buy. Model rate rises, vacancy, and slower growth with the Investment Property Yield Calculator.

Important 2026 Policy Change — What Investors Need to Know

In the May 2026 Federal Budget, the Australian government announced changes to negative gearing rules for established residential properties purchased after 12 May 2026 (Budget night). The changes take effect from 1 July 2027.

Under the new rules (for affected properties):

• Rental losses from established properties cannot be offset against wages or other income.
• Losses are quarantined — they can only be offset against residential rental income or future capital gains from rental properties.
• Unused losses are carried forward to future years.

What remains unchanged:

• Grandfathered properties: Properties purchased before 12 May 2026 (or already under contract before that date) continue under the existing rules — indefinitely. The full negative gearing deduction against all income remains available for these properties.
• New builds: Newly constructed properties remain fully exempt. Investors in eligible new builds can access both negative gearing against all income and the 50% CGT discount.
• 2025–26 and 2026–27 tax years: All current properties operate under existing rules until at least 1 July 2027.

For investors who purchased before Budget night, the examples in this guide remain fully applicable. For investors considering established properties after 12 May 2026, the tax benefit profile changes significantly under the new quarantining regime — speak with a registered tax agent before proceeding.

Assess your capital gains position at sale with the Capital Gains Tax Calculator.

Frequently Asked Questions

Q: What does negative gearing mean in Australia? A: Negative gearing occurs when the deductible expenses of an investment property — interest, rates, insurance, property management fees, depreciation — exceed the rental income it generates. The resulting loss reduces your taxable income from other sources (typically wages), producing a lower tax bill or a tax refund. The term comes from "gearing" — using borrowed money to invest — and "negative" refers to the negative cash flow position after costs.

Q: How much tax do you save from negative gearing? A: Your tax saving equals your net rental loss multiplied by your effective marginal tax rate (including the 2% Medicare levy). On a $13,200 loss at a 39% effective rate, the annual tax saving is $5,148 — approximately $99/week. At a 47% effective rate (income above $190,000), the saving rises to $6,204 — about $119/week. Use the Negative Gearing Calculator for your specific numbers.

Q: Is negative gearing worth it in 2026? A: For properties purchased before 12 May 2026, the rules are unchanged for the current financial year and beyond. For established properties purchased after that date, the 2026 Budget changes will quarantine losses from 1 July 2027. The investment case depends heavily on capital growth expectations, your marginal tax rate, and your ability to fund the weekly top-up. New builds remain the most tax-advantaged option under current and proposed rules.

Q: What is the difference between Division 40 and Division 43 depreciation? A: Division 43 (capital works) covers the building structure and depreciates at 2.5% per year over 40 years on post-1987 buildings. Division 40 (plant and equipment) covers removable fixtures and fittings — appliances, carpet, hot water systems, blinds — each depreciating at asset-specific rates over their effective life. For properties bought after 9 May 2017, Div 40 deductions are only available for new items the investor installs, not pre-existing second-hand items.

Q: What is a rental yield and how does it relate to gearing? A: Rental yield is your annual rental income expressed as a percentage of the property's value. A $700,000 property generating $31,200/year in rent has a gross rental yield of 4.46%. When your rental yield is lower than your borrowing rate (6.5% in our example), you will almost always be negatively geared. Sydney and Melbourne gross yields typically sit between 2.5% and 4%, making negative gearing common for investors with standard LVR loans.

Q: Can I reduce my PAYG tax withholding because of negative gearing? A: Yes. You can apply to the ATO for a PAYG withholding variation (using the Income tax withholding variation application form). If approved, your employer withholds less tax from each pay cycle, effectively giving you the tax benefit week by week rather than as a lump sum at tax time. This is a legitimate ATO-administered process — not a "hack." It requires an accurate estimate of your expected rental loss and is reviewed annually.

Q: Do I pay tax on capital gains when I sell a negatively geared property? A: Yes. When you sell, any capital gain is taxable. If you have held the property for more than 12 months, you are eligible for the 50% CGT discount — meaning only half the gain is added to your taxable income. Note that Div 43 deductions claimed over the holding period reduce your cost base, increasing the capital gain. The Capital Gains Tax Calculator can model your estimated CGT liability at sale.

Q: What costs can I claim as deductions on an investment property? A: Deductible expenses include loan interest, property management fees, council rates, water rates, building and landlord insurance, repairs and maintenance (not capital improvements), advertising for tenants, body corporate fees, accounting fees, and depreciation (Div 43 + Div 40). Capital improvements are not immediately deductible — they are added to the cost base or depreciated over time. See the ATO guide on rental property deductions for the full list.

Methodology and Data Sources

Tax bracket figures in this guide reflect the 2025–26 ATO schedule as amended by the Stage 3 tax cuts applying from 1 July 2024 and continuing through the 2025–26 financial year. Medicare levy figures assume the standard 2% rate applicable to most taxpayers. Worked examples use rounded figures for illustration — actual tax liability will vary based on individual deductions, offsets, and the Low Income Tax Offset (LITO). Depreciation examples are indicative and based on typical Div 43 and Div 40 schedules for post-1987 residential construction. Policy change information reflects the Federal Budget announcement of 12 May 2026 as publicly reported; legislation had not been enacted at the time of publication. All information is general in nature and does not constitute financial or tax advice.

Official and reference sources:

• ATO — Rental properties guide 2025
• ATO — 2025–26 tax rates for individuals
• ASIC MoneySmart — Investment properties
• RBA — Housing and property market statistics

Ready to see your exact after-tax numbers? Use the free Negative Gearing Calculator — enter your income, loan amount, and rental return for an instant result. No sign-up required.