The ATO Is Effectively Lending You Money to Buy Property. Here's the Maths.

I am going to reframe negative gearing in a way that will change how you think about it forever.

Forget the political debate. Forget whether it is "fair" or "unfair." Look at it purely as a financial mechanism.

When you make a loss on an investment property — because your expenses (interest, maintenance, depreciation) exceed your rental income — the ATO allows you to deduct that loss from your employment income. If you are in the 37% or 45% tax bracket, the ATO effectively refunds 37-45 cents for every dollar you lose on the property.

Put differently: the ATO is co-investing in your property. For every $10,000 of annual loss, they contribute $3,700-$4,500 back to you in reduced tax.

That is not a loophole. That is a policy mechanism that has existed since the 1930s, survived one attempted abolition (1985-1987, which caused a rental crisis), and has bipartisan political protection because nobody wants to trigger another housing supply collapse.

Let me show you how our high-income clients use this to build portfolios that the ATO partially funds.

The high-income negative gearing playbook

This structure does the most work for someone in the top marginal bracket — taxable income above $190,000, taxed at 45 per cent before the 2 per cent Medicare levy. The worked example below uses that rate; at a lower marginal rate every number in it shrinks.

Step 1: Buy a $750,000 house in Melbourne's southeast. Large block, high land value, limited renovation needed. Standard rental: $450-$500/week.

Step 2: Hold on interest-only at 6.2%. Annual interest: $37,200 (on 80% LVR of $600,000). Annual rent: $24,960 ($480/week average). Annual holding costs (rates, insurance, maintenance): $6,200. Annual depreciation (building + fixtures): assumed at $8,000 for the illustration — your own figure comes from a quantity surveyor's schedule and depends on the building's construction date and original cost, the plant and fixtures, and whether the property was new when you acquired it.

Total expenses: $51,400. Total income: $24,960. Annual loss: $26,440.

Step 3: The $26,440 loss is claimed against your salary income. At a 45 per cent marginal rate the deduction is worth $11,898 — whether you can claim it in full, and at what rate, depends on your income and your ownership structure.

On those assumptions the out-of-pocket cost after the refund is $26,440 - $11,898 = $14,542 a year, or $280 a week. Change any input — a different marginal rate, a different ownership structure, a different depreciation schedule — and the answer moves with it.

Step 4: Meanwhile, the property appreciates at 7-8% per year. On $750,000, that is $52,500-$60,000 in annual capital growth.

On those numbers the rent covers most of the holding cost, the deduction offsets 45 cents in the dollar of what is left at that marginal rate, and you fund the remainder. What the land does over the same period is a separate question, and not one the tax system answers.

After the 50% CGT discount (for holding over 12 months), your effective tax on the capital gain when you eventually sell is approximately 22.5% — less than half your marginal income tax rate.

"The ATO is not your enemy. It is your silent business partner. Where a property runs at a loss, the deduction comes back at your marginal rate — which is exactly why structure and settlement timing are worth proper advice before you buy, not after you sell." — Joey Don, PremiumRea

When negative gearing becomes positive cash flow

Here is the part that most negative gearing critics miss: the strategy has a built-in expiry date.

Rents increase over time. Melbourne rents have grown at approximately 4-5% per year over the past three years. Your interest payments, if on a fixed or IO structure, remain constant in nominal terms.

On our example property:

• Year 1 rent: $480/week → annual loss $26,440
• Year 3 rent: $540/week (assuming 4% annual growth) → annual loss reduced to $19,800
• Year 5 rent: $590/week → annual loss reduced to $12,200
• Year 7 rent: $650/week → property approaches cash-flow neutral
• Year 8-10: property is cash-flow positive

The negative gearing period is the launch phase. You are subsidised by the ATO during the years when the property is most expensive to hold. As rental income grows, the subsidy naturally phases out and the property becomes self-sustaining.

This is why, as a Melbourne buyers agent, we tell clients: do not fear negative cash flow in years 1-3. It is temporary by design, and the ATO is covering nearly half of it. The long game is capital appreciation plus eventual positive cash flow.

August 2026 update: the mechanics above now come with a date attached. Under the federal budget package announced on 12 May 2026, buyers of established property who sign contracts after that date can offset rental losses against wage income only until 30 June 2027 — after that, only against other rental income. Holdings at announcement are grandfathered and new builds keep full deductibility. The approach in this article — buying toward positive cash flow so the deduction is a launch subsidy rather than the investment case — is the position least changed by the new rules; see the 2026 federal budget investor playbook for the cohort-by-cohort detail.

Frequently asked questions

Will negative gearing be abolished? It has now been restructured rather than abolished. The May 2026 federal budget kept negative gearing for grandfathered holdings and for new builds, but removed wage-income offsets for established-property contracts signed after 12 May 2026, with a transition running to 30 June 2027. The 1985-1987 history still matters: that abolition triggered a rental crisis and was reversed within two years, and the 2026 package avoids the retrospective element by grandfathering existing investors.

Can I negative-gear if I am self-employed? Yes. Self-employed individuals can offset investment losses against their business income. The key is maintaining strict separation of personal and investment finances — a dedicated bank account for the investment property is essential for ATO compliance.

Does depreciation get clawed back when I sell? Partially. Building depreciation claimed during ownership reduces your CGT cost base, effectively increasing the taxable gain on sale. However, this clawback is at the CGT-discounted rate (50% discount for 12+ month holding), while the deductions were claimed at your full marginal rate. The net effect is still positive for the investor.

Does the 2026 budget change this playbook? For new contracts on established property signed after 7:30pm on 12 May 2026 — yes: wage-income offsets run only until 30 June 2027, then losses offset only other rental income. Portfolios held at announcement are grandfathered, and new builds keep full deductibility, so the worked example still applies to grandfathered holdings and new-build purchases. The cohort detail is in our 2026 federal budget investor playbook.