Negative Gearing Explained — How Australian Property Tax Works (2026)

Negative gearing occurs when an investment property's expenses — mortgage interest, rates, insurance, maintenance — exceed its rental income, creating a loss that reduces your taxable income. On a $700,000 purchase at 80% LVR interest-only at 6.5%, annual interest is $36,400 and holding costs about $6,150, against rental income of roughly $28,600, giving a $13,950 annual loss. At a 45% marginal rate that returns $6,278 from the ATO, so the actual out-of-pocket cost is $7,672.

It works best for high-income earners on $150K or more, because a higher tax bracket means a larger refund percentage, and for growth-focused investors who are paying a small annual holding cost in exchange for exposure to land appreciation. We typically see it fit clients earning $150K+ with the capacity to absorb $5,000 to $10,000 a year in holding costs.

It is not suitable for low-income earners, because the tax refund is too small to justify the annual shortfall; for cash-flow-dependent investors such as retirees and self-funded retirees; or for SMSF investors, because super funds are already taxed at a concessional 15% so the deduction is worth far less.

Mortgage interest is the largest — on an interest-only loan the entire repayment is deductible. Land tax at roughly $2,000 a year, council rates at roughly $2,000, water and service charges at around $650, landlord insurance, property management fees, and maintenance and repairs that maintain rather than improve the property are all deductible in the year incurred.

Stamp duty at roughly 5.5% of the purchase price, the buyer's agent fee of $15,800 + GST, loan principal repayments and capital improvements are not deductible in the current year. Stamp duty, the buyer's agent fee and capital improvements are added to the cost base for capital gains tax, so they reduce the taxable gain when you sell rather than your income now.

The building component depreciates at 2.5% per year of construction cost, so a $110K granny flat generates roughly $2,750 a year in building depreciation. At a 37% marginal rate that is about $1,018 a year in tax benefit. Depreciation is a non-cash deduction — it reduces taxable income without you spending anything in that year.

That depends entirely on whether the capital growth exceeds the annual after-tax holding cost, which is not something anyone can promise you. In the worked example on this page, a $7,672 after-tax annual cost is set against a hypothetical 8% growth on $700K. Eight percent is an assumption used to illustrate the arithmetic, not a forecast — property values fall as well as rise, and the loss is certain while the growth is not.

Yes — under current Australian rules a net rental loss is offset against your other assessable income, including salary, which is why the marginal rate determines the value of the deduction. PremiumRea is not a registered tax agent and this is general information; the treatment of your own return is a question for your accountant.