Negative Gearing on Investment Property: The Maths (FY2025-26)

TL;DR

A property is negatively geared when the cash you spend on it each year (interest on the loan, council rates, strata, agent fees, repairs, water, insurance) exceeds the rent it generates. The shortfall is a rental loss, and Australia's tax law lets you deduct that loss against your salary or other taxable income — at your marginal rate. That is the mechanism known as negative gearing.

Three things matter for the actual maths:

The tax saving is your marginal rate, not 100% of the loss. A $20,000 net rental loss at a 37% marginal rate gives back $7,400 at lodgement, not $20,000. You are still out of pocket $12,600 of cash per year.
Depreciation widens the loss without costing cash. Capital works (Division 43) and plant-and-equipment (Division 40) deductions reduce taxable income but do not require any actual cash outlay. The trade-off is they reduce the property's CGT cost base when you sell.
The strategy only "wins" if capital growth exceeds the after-tax cost. A property losing $12,600 of after-tax cash per year needs to grow in value by at least that amount in real dollars to break even, before you pay CGT on the eventual sale.

The interaction with HECS-HELP, Medicare Levy Surcharge, Division 293 and the new Stage 3 tax brackets means the after-tax cost of the same negatively geared property differs by 30 to 40% between a $90,000 earner and a $250,000 earner. The Negative Gearing Calculator handles the full FY2025-26 calculation; the Property Depreciation Calculator handles the Division 40 and Division 43 schedules.

How negative gearing actually works

The mechanic is not a special tax break — it is the ordinary rule that expenses incurred to produce assessable income are deductible. Rental income is assessable; the rental property's running costs are deductible against it. If those deductions exceed the rent, you have a rental loss. Australian tax law lets you offset that loss against your other assessable income in the same year (unlike, say, the United States where rental losses can be quarantined for high-income taxpayers).

The deductible expenses include:

Interest on the investment loan — usually the largest line item. Principal repayments are not deductible.
Council rates and water rates — for the period the property was rented or genuinely available for rent.
Strata levies — administration and general purpose levies are deductible in the year paid; special levies for capital improvements are usually capital works.
Property management fees — agent's percentage, letting fees, leasing fees.
Repairs and maintenance — distinct from capital improvements. Repairs restore the property to working order; capital improvements add to the property's value or function.
Insurance — building, landlord, public liability.
Land tax — payable in some states once aggregate landholding crosses the threshold.
Depreciation — Division 43 (capital works, the building shell) and Division 40 (plant and equipment, removable items).
Pest control, gardening, cleaning, smoke alarm servicing.
Travel — but only for property managers and corporate owners; individual residential property owners cannot claim travel to inspect their property since the 2017 changes.

If the sum of these is greater than the rent received, the excess is your rental loss. The ATO uses the Rental Schedule in your tax return (label 21) to capture income and each category of expense.

The depreciation lever

Depreciation is the most misunderstood item on the rental schedule because it produces a deduction without any current-year cash outlay.

Division 43 (capital works) — for residential property built after 17 July 1985, the building shell is deductible at 2.5% per year for 40 years. A $400,000 build cost (excluding land) gives $10,000 per year of capital works deduction for 40 years.

Division 40 (plant and equipment) — items like the oven, dishwasher, blinds, carpet, hot water system, air conditioning. These are depreciated over their effective life (often 6 to 12 years) using either the prime cost or diminishing value method. A $30,000 fit-out can typically generate $4,000 to $7,000 of deduction in early years.

There are two important traps.

The first is the 2017 change to plant-and-equipment for second-hand residential property. If you bought an established home (not new), you generally cannot claim Division 40 deductions on items that were already in the property. New construction or substantial renovations after the 9 May 2017 announcement still allow full Division 40.

The second is CGT cost-base adjustment. Division 43 deductions reduce the property's cost base when you sell, increasing the eventual capital gain. So depreciation shifts the tax saving from now (high marginal rate) to later (lower effective rate after the 50% CGT discount). For a property held more than 12 months at a 45% marginal rate, the effective rate on the gain is 22.5% — so depreciation's "free deduction" is genuinely valuable but not as valuable as it first appears.

The Property Depreciation Calculator walks through both schedules.

Cash flow vs tax saving

A common confusion: people see "$20,000 rental loss" on a friend's tax return and think the friend is making $20,000 of free money. The actual cash position is the opposite. The friend is out of pocket $20,000 of cash during the year. They get a tax refund of (loss × marginal rate) at lodgement. At a 37% marginal rate that refund is $7,400. Net out-of-pocket: $12,600.

The strategy only makes sense if the capital growth on the property exceeds that net out-of-pocket cost over the holding period. A property worth $700,000 that grows at 4% per year is up $28,000 in year 1. After the 50% CGT discount on eventual sale at the 37% marginal rate, the after-tax gain on that $28,000 is roughly $22,820. The strategy "works" in cash terms when the growth-after-CGT exceeds the holding-cost-after-tax — in this stylised example, $22,820 > $12,600, so the property is up roughly $10,200 per year on a total return basis.

Notice how sensitive that is to (a) growth rate (the 4% number drives almost the entire return) and (b) marginal rate (the higher your marginal rate, the better the geared structure looks).

Official source

ATO — Rental properties guide — ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-properties
ATO — Capital gains tax — same parent page.
Treasury — Tax expenditures and insights statement (annual) — treasury.gov.au.
ASIC ASIC's MoneySmart — Investing in property — moneysmart.gov.au.

The ATO's Rental properties guide is the operational reference for what is deductible and how. Treasury's Tax expenditures statement publishes the aggregate cost of negative gearing each year — useful context but not relevant to your individual position.

Worked examples

The numbers below assume FY2025-26 personal income tax rates, the 2% Medicare Levy, and that the property is a residential investment held by a single owner.

Example 1 — First investment property, Sydney middle ring

Purchase price: $850,000 (3-bedroom unit, 2010 build, established)
Loan: $680,000 at 6.20% interest-only
Annual rent: $36,400 (= $700/week × 52)
Council rates: $1,800; water rates: $1,200; strata: $4,800; insurance: $1,200; agent (7% + leasing): $3,500; repairs: $1,500.
Capital works deduction (build cost ≈ $300,000 × 2.5%): $7,500
Plant and equipment: $0 (second-hand residential, post-2017)
Owner's salary: $140,000 (37% marginal rate)
HECS-HELP: $0

Annual expenses:

Interest: $680,000 × 6.20% = $42,160
Other cash: $1,800 + $1,200 + $4,800 + $1,200 + $3,500 + $1,500 = $14,000
Capital works (non-cash): $7,500
Total deductions: $63,660

Rental loss = $36,400 − $63,660 = −$27,260.

Tax refund at 37% marginal rate = $27,260 × 37% = $10,086.

Net cash position:

Cash out: $42,160 (interest) + $14,000 (other) = $56,160
Cash in: $36,400 (rent)
Cash out before tax: $19,760
Tax refund: $10,086
Net out-of-pocket per year: $9,674

Plus the impact on HRI for HECS-HELP if applicable, the Medicare Levy Surcharge if no private cover, and the eventual CGT cost base reduction from the $7,500 of capital works deduction (over the holding period).

For the property to break even on a total return basis, capital growth must exceed about $15,000 per year (= $9,674 net cost ÷ (1 − 22.5% effective CGT rate)). On an $850,000 property that is 1.8% per year — which is well below Sydney's long-term average. Hence the strategy "works" most of the time on long-run averages, but year-to-year cash discipline is essential.

Example 2 — High-income GP, brand-new apartment off-the-plan

Purchase price: $1,250,000 (new 2-bed apartment, full Division 40 schedule available)
Loan: $1,000,000 at 6.40% interest-only
Annual rent: $45,500 (= $875/week × 52)
Capital works: $400,000 build × 2.5% = $10,000 per year
Plant and equipment: $8,000 in year 1 (new build, full schedule)
Cash expenses: $20,000 (council, water, strata, insurance, management, repairs, depreciation report)
Owner's salary: $300,000 (45% marginal rate)
HECS-HELP: $30,000 outstanding

Interest: $1,000,000 × 6.40% = $64,000. Total deductions: $64,000 + $20,000 + $10,000 + $8,000 = $102,000. Rental loss = $45,500 − $102,000 = −$56,500.

Tax refund at 45% + 2% Medicare = 47%: $56,500 × 47% = $26,555.

But the GP also faces the HECS-HELP HRI add-back. HRI = taxable income + reportable super + rental loss. The $56,500 rental loss is added back to HRI, pushing HRI to $300,000 + $56,500 = $356,500 (10% band, $35,650 compulsory repayment).

Without the rental loss the HRI would have been $300,000, repayment $30,000. So the property adds $5,650 to the HECS-HELP bill. The net tax saving is therefore $26,555 (income tax) − $5,650 (HECS-HELP) = $20,905.

Net out-of-pocket = ($64,000 + $20,000 − $45,500) − $20,905 = $17,595 per year.

This is the case for negative gearing high-income earners are usually pitched: a $1.25M property at $17,595 of true after-tax holding cost. If Brisbane apartments grow 4% per year (= $50,000), the GP is up $32,405 per year on a total return basis before paying CGT on eventual sale — a respectable return on the $250,000 of equity deployed.

The catch: every dollar of that comes from leverage and capital growth assumptions, both of which can reverse.

Example 3 — Modest investor, single income, regional Queensland

Purchase price: $420,000 (3-bedroom house, regional Queensland, established)
Loan: $336,000 at 6.10% interest-only
Annual rent: $26,000 (= $500/week × 52)
Cash expenses: $9,500 (council, water, insurance, management, repairs)
Capital works: $5,500 (assume 2002 build, $220,000 build cost)
Plant and equipment: $0 (second-hand residential)
Owner's salary: $72,000 (30% marginal rate)
HECS-HELP: $15,000 outstanding

Interest: $336,000 × 6.10% = $20,496. Total deductions: $20,496 + $9,500 + $5,500 = $35,496. Rental loss = $26,000 − $35,496 = −$9,496.

Tax refund at 30% + 2% Medicare = 32%: $9,496 × 32% = $3,039.

HECS-HELP HRI add-back: HRI = $72,000 + $9,496 = $81,496 (4% band, repayment $3,260). Without the property HRI would be $72,000 (3% band, $2,160). Property adds $1,100 to HECS-HELP.

Net tax saving: $3,039 − $1,100 = $1,939.

Net out-of-pocket = ($20,496 + $9,500 − $26,000) − $1,939 = $2,057 per year, or about $40 per week. Modest but manageable. For regional Queensland to make the strategy "work", capital growth needs only $2,650 per year (1.6% on $420,000 net of CGT).

The interesting feature of this example: the after-tax cost of the same $9,496 loss is half of what the GP saved on the same pre-tax loss. The marginal rate matters enormously to who can sustain a leveraged investment property — which is why the strategy disproportionately favours higher-income earners and why the policy debate exists.

Common pitfalls

Treating the tax refund as profit. It is not. The refund partly reimburses your out-of-pocket holding cost. Net cash flow is negative until either rents rise or you sell.
Ignoring HECS-HELP add-back. The rental loss is added back to HRI for HECS-HELP repayment. A $20,000 loss at the 7% HECS-HELP band adds $1,400 to the compulsory repayment. The HECS-HELP Repayment Calculator handles this.
Capitalising repairs. Painting after a tenant trashes the kitchen is a repair (deductible in full this year). Renovating the kitchen is a capital improvement (depreciated over 40 years). Mis-categorising can cost a deduction or trigger an audit.
Missing the 7-day rule for travel. Individual residential investors cannot deduct travel costs to inspect their property. Property managers and entities (companies, super funds, partnerships) sometimes can, but the rules are tight. Do not include flights and accommodation as deductions on a residential rental schedule.
Buying second-hand expecting full Division 40 depreciation. The 2017 change quarantines existing plant-and-equipment depreciation for second-hand residential. New builds and substantial renovations after 9 May 2017 still get the full schedule. Always commission a quantity surveyor's report (Schedule of Depreciable Assets) before lodgement — fee around $700, deduction value usually $3,000-$7,000 in year 1.
Ignoring land tax. Once you cross your state's threshold, land tax adds a lumpy expense. The thresholds and rates vary widely — see Land Tax Calculator NSW, Land Tax Calculator VIC, Land Tax Calculator QLD for the relevant state. Aggregating across states is a separate trap.
Forgetting the 6-year rule on a former main residence. If you move out of your main residence and rent it out, you can keep treating it as your main residence for CGT purposes for up to 6 years (the Section 118-145 absence rule). This often interacts with negative gearing during a temporary relocation. The CGT 6-Year Rule Calculator has the full mechanic.
Confusing positive and negative gearing. A property where rent exceeds expenses is positively geared and produces taxable income. The 50% CGT discount on eventual sale still applies, but the year-to-year cash position is the opposite — you owe tax on the rent surplus. Many high-yield regional and outer-suburb properties are positively geared.
Assuming negative gearing rules are stable. Both major parties have at various times proposed changes (grandfathering, restriction to new builds, complete removal). The current rules have been in place since 1985 (with a brief reversal 1985-1987) but the political risk is real. Build a portfolio that survives a rule change.

How interest rates change the picture

Roughly speaking, every 0.50 percentage point of interest rate change moves a $680,000 loan's annual cost by $3,400. At a 37% marginal rate that is $1,258 of net after-tax cost difference per year.

The implication: the negative gearing strategy was a no-brainer at 3% rates and a tighter call at 6.5% rates. Many investors who entered the market in 2020-2021 at sub-3% rates found their net out-of-pocket figure double or triple after 2022's rate hikes. Sustainability of the strategy depends as much on the rate path as on the marginal income tax rate.

What happens at sale: capital gains tax

The eventual sale is when the deferred tax catches up. Here is the mechanic for an asset held more than 12 months by an individual:

Capital proceeds — the sale price less selling costs (agent fee, solicitor, advertising).
Cost base — the original purchase price plus stamp duty, legals, capital improvements, minus the cumulative Division 43 capital works deductions you have claimed.
Capital gain = capital proceeds − cost base.
50% CGT discount for individual ownership held more than 12 months → assessable capital gain is half the raw gain.
Added to taxable income at the marginal rate.

Worked example for the GP from Example 2: bought $1,250,000, sold ten years later at $1,750,000. Selling costs $30,000. Cumulative Division 43 over 10 years = $100,000.

Capital proceeds: $1,750,000 − $30,000 = $1,720,000.
Cost base: $1,250,000 + $50,000 (stamp duty/legals) − $100,000 (capital works deduction add-back) = $1,200,000.
Raw gain: $520,000.
After 50% discount: $260,000.
Tax at 47% combined: $122,200.

Net cash from sale (before loan payout): $1,720,000 − $122,200 = $1,597,800. Loan payout (interest-only, balance $1,000,000): $1,000,000. Net to GP: $597,800.

Compared to original equity of $250,000 plus 10 × $17,595 of net holding cost = $425,950 of capital deployed, the GP's all-in profit is $597,800 − $425,950 = $171,850. That is a respectable return — but the realised IRR depends heavily on the timing of sale and the actual growth path. Stress-test the same numbers at $1,500,000 sale and the profit collapses.

Stress-testing your numbers

Before signing the contract:

Run the property at the current interest rate, the long-run average (around 5%), and a stress scenario (current + 2 percentage points).
Run rent at the advertised figure, 80% occupancy (allowing for vacancy weeks), and at unchanged rent for 3 years.
Layer in 20% buffer for unforeseen repairs — hot water systems, structural issues, tenant damage.

The Negative Gearing Calculator lets you toggle the rate and rent scenarios.

Related calculators

Negative Gearing Calculator — full FY2025-26 cash-flow and tax calculation.
Property Depreciation Calculator — Division 40 and Division 43 schedules.
CGT 50% Discount Calculator — eventual sale calculation, including the 12-month holding test.
CGT 6-Year Rule Calculator — for a former main residence rented out.
Land Tax Calculator NSW, VIC, QLD — annual land tax impact.
HECS-HELP Repayment Calculator — the rental loss add-back.
Foreign Purchaser Surcharge VIC and equivalent state surcharges — relevant if you are buying as a non-resident.
Vacant Residential Land Tax VIC — the additional impost in Victoria for properties left vacant.

A note on Division 7A and trust structures

Some investors hold investment properties through a discretionary trust, a unit trust or a corporate beneficiary. The negative gearing maths inside a trust differs in two ways:

Trust losses are quarantined inside the trust. Unlike individual ownership, a trust cannot stream the rental loss to a beneficiary's other taxable income. The loss carries forward to be offset against future trust income or capital gains.
The 50% CGT discount may or may not flow through. A discretionary or unit trust can pass the discount through to individual beneficiaries; a company cannot.

For most owner-occupier-turned-investor situations, individual ownership is simpler and more tax-effective. Trust structures make sense for asset protection, multi-property portfolios, or estate planning — not for the tax savings alone. Get specific advice from a registered tax agent before structuring through a trust.

This article is general information based on the FY2025-26 tax rules and the ATO documents linked above. It is not personal financial or tax advice. Investment property is a long-horizon, high-leverage decision; talk to a registered tax agent and a licensed financial adviser before committing capital.