Negative Gearing in Australia: How It Works, What It Saves & the 2026 Budget Changes

Negative gearing is one of the most talked-about and least understood features of the Australian tax system. It allows property investors to deduct rental losses — when a property costs more to hold than it earns in rent — directly from their salary or other income, reducing their total tax bill.

For decades it has been available on all residential investment properties. The May 2026 Federal Budget changed that, introducing quarantining rules for established properties purchased after 12 May 2026. Properties purchased before that date — and all new builds — remain fully eligible under the existing rules.

This guide explains exactly how negative gearing works, what it saves at each marginal rate, how depreciation amplifies the benefit, and what the 2026 Budget changes mean for your situation.

Use the Dolaro Negative Gearing Calculator to calculate your annual tax saving and real weekly out-of-pocket cost.

Quick answer: Negative gearing occurs when your rental deductions exceed your rental income, producing a loss that reduces your taxable income. A $20,000 rental loss at a 37% marginal rate saves $7,400 in tax annually — or $142/week. The 2026 Budget quarantines losses on established properties purchased after 12 May 2026 from 1 July 2027. New builds and properties bought before 12 May 2026 retain the full benefit.

How Negative Gearing Works in Australia

When you own an investment property, your rental income and all associated expenses are declared in your annual tax return. The key calculation is simple:

Net rental position = Rental income − All deductible expenses

If your expenses exceed your income, you have a net rental loss — your property is negatively geared. Under Australia's personal income tax rules, this loss is deducted from your other assessable income (salary, wages, business income), reducing your total taxable income and therefore your tax bill.

The mechanics step by step:

You earn $110,000 in salary — tax payable: approximately $25,117
Your rental property produces $30,000 in income and $48,000 in deductible expenses — a $18,000 rental loss
Your taxable income becomes $110,000 − $18,000 = $92,000
Tax on $92,000: approximately $19,717
Tax saving from negative gearing: $5,400 ($25,117 − $19,717)

The investor is out of pocket $18,000 in cash (the rental loss) but receives $5,400 back from the ATO through a reduced tax liability — either as a reduced withholding via a PAYG Variation or as a refund at tax time.

The PAYG Variation — Getting Your Tax Saving Now

Rather than waiting until you lodge your annual tax return to receive the tax saving as a refund, you can apply to the ATO for a PAYG Withholding Variation (Form 15-T). This allows your employer to reduce the tax withheld from each pay cycle — effectively receiving the annual tax benefit spread across every paycheck throughout the year.

At a 37% marginal rate on a $18,000 rental loss, the annual tax saving is $6,660 — or $128 per week. With a PAYG Variation in place, that $128 shows up in your take-home pay every fortnight rather than arriving as a lump sum in July.

What Negative Gearing Saves at Each Tax Rate

The value of negative gearing is directly proportional to your marginal tax rate. Higher income earners receive a proportionally larger tax benefit from the same rental loss.

Marginal rate	Income range	Tax saving per $10,000 rental loss	Weekly equivalent
16%	$18,201–$45,000	$1,600	$30.77/week
30%	$45,001–$135,000	$3,000	$57.69/week
37%	$135,001–$190,000	$3,700	$71.15/week
45%	Above $190,000	$4,500	$86.54/week

Plus 2% Medicare Levy applies to each bracket.

This progressive structure is why negative gearing is most valuable to high-income earners — and why it has attracted ongoing policy debate. An investor on $180,000 receives $4,500 back from the ATO for every $10,000 in rental losses, while an investor on $60,000 receives only $3,000 for the same loss.

The Role of Depreciation — Your Most Powerful Lever

Depreciation is the aspect of negative gearing that most investors underestimate, and the reason why the actual after-tax cost of an investment property is often much lower than the raw cash figures suggest.

Depreciation allows you to claim a tax deduction for the wear and tear of the building and its fittings — without any cash outgoing. You don't spend the money in the current year, but you still get the tax deduction.

There are two types:

Division 43 — Building Allowance: 2.5% of the original construction cost per year for up to 40 years. A property built in 2015 with a construction cost of $250,000 generates $6,250 per year in Div 43 deductions.

Division 40 — Plant and Equipment: Depreciable assets within the property (hot water systems, air conditioning, appliances, carpets, blinds). Each asset depreciates at its ATO-prescribed rate over its effective life.

Combined example: A $700,000 property purchased in 2022 with a $300,000 construction cost and $40,000 in plant and equipment might generate:

Div 43: $300,000 × 2.5% = $7,500/year
Div 40: approximately $4,000/year in year one (declining over time)
Total depreciation: $11,500/year

At 37% marginal rate, this $11,500 in non-cash deductions saves $4,255 per year in tax — approximately $82/week — without any additional spending.

A Quantity Surveyor (QS) depreciation report (cost: $500–$800, tax deductible) is the standard method for establishing these figures. It is almost always worth commissioning for any investment property.

Worked Example: Full Negative Gearing Calculation

Property: $750,000 established house purchased in 2023 (before the Budget cutoff) Loan: $600,000 interest-only at 6.0% = $36,000/year interest Rent: $620/week = $32,240/year Investor salary: $130,000 (marginal rate: 37%)

Item	Amount
Annual rental income	$32,240
Mortgage interest	$36,000
Property management (8.5%)	$2,740
Council rates	$1,800
Landlord insurance	$1,400
Repairs and maintenance	$1,200
Div 43 depreciation ($280,000 × 2.5%)	$7,000
Div 40 plant and equipment	$3,500
Total deductions	$53,640
Net rental loss	($21,400)

Tax saving: $21,400 × 37% = $7,918/year ($152/week)

After-tax weekly cost:

Cash out of pocket per week: ($32,240 − $36,000 − $2,740 − $1,800 − $1,400 − $1,200) ÷ 52 = ($10,900) ÷ 52 = $210/week cash shortfall
Less weekly tax saving: $152/week
Real weekly cost after tax: $58/week

The depreciation alone ($10,500/year at 37%) saves $3,885/year — nearly $75/week — without any cash outgoing. Remove the depreciation and the weekly cost doubles.

Use the Negative Gearing Calculator to model your specific property.

The 2026 Budget Changes: What Changed and What Didn't

The May 2026 Federal Budget introduced the most significant change to negative gearing policy in decades. Here is precisely what changed:

What Changed

From 1 July 2027, rental losses on established residential properties purchased after 12 May 2026 will be quarantined. This means:

The rental loss can no longer be offset against salary or wages income
The loss is carried forward and can only offset future rental income from the same property (or other rental income)
When the property is eventually sold, any accumulated quarantined losses are deducted from the capital gain

Quarantined losses are not lost — they accumulate and are eventually used. But the immediate annual tax saving against salary income is removed for affected properties.

What Did NOT Change

Properties purchased before 12 May 2026: Existing investors are fully grandfathered. Negative gearing against salary income continues indefinitely for these properties. There is no sunset clause, no phase-out period, and no requirement to do anything.

New builds: New residential construction (off-the-plan apartments, house and land packages, new builds) purchased at any time — including after 12 May 2026 — retain full negative gearing treatment. The loss can still be offset against salary income regardless of when purchased.

Commercial property: The quarantining rules apply to residential investment properties only. Commercial property negative gearing is unaffected.

The Key Decision Table

Property type	Purchased	Negative gearing against salary from 1 July 2027
Established residential	Before 12 May 2026	✅ Yes — fully grandfathered
Established residential	After 12 May 2026	❌ No — losses quarantined
New build / off-the-plan	Any time	✅ Yes — fully retained
Commercial property	Any time	✅ Yes — unaffected

Is Negative Gearing Worth It?

Negative gearing as a standalone strategy — buying a property specifically to generate a tax loss — has never been good financial advice. The tax saving is real, but it requires spending more money than you receive in rent. You are not making money from the tax benefit; you are losing less.

The genuine case for negative gearing is as a complementary benefit that reduces the real cost of holding a growth asset. The logic:

You believe the property will grow in value significantly over 10–20 years
The annual cash shortfall (rent minus costs) is the price of holding that growth asset
Negative gearing reduces the effective cash shortfall through the tax benefit
The growth asset (the property) eventually produces a capital gain that far exceeds the accumulated cash shortfall

At $58/week after-tax holding cost on the example above, the investor is paying approximately $30,160 over 10 years to hold a $750,000 property that might grow to $1,200,000–$1,500,000 over that period.

When negative gearing is genuinely advantageous:

Your marginal rate is 37% or 45% — the tax saving is meaningful
The property has strong capital growth fundamentals
You have the cash flow to sustain the weekly cost over a long holding period
The property has good depreciation deductions (newer, or well-maintained)

When it is less valuable:

Your marginal rate is 30% or below — the tax saving is smaller and the math is tighter
The property is in a low-growth market where capital appreciation is unlikely to compensate
The quarantining rules apply (established property purchased after 12 May 2026) — the annual tax benefit against salary disappears

Negative Gearing vs Positive Gearing

Negatively geared property: Costs more to hold than it earns. Annual cash shortfall is offset by tax saving and (you hope) capital growth.

Positively geared property: Earns more in rent than it costs to hold. After-tax cash flow is positive each year, but rental profit adds to your taxable income.

The trade-off: negatively geared properties tend to be in higher-growth markets (inner city, established suburbs) with lower rental yields. Positively geared properties tend to be in regional areas or lower-priced markets with higher yields but potentially lower capital growth.

Neither is universally better — the right choice depends on your income, cash flow, investment horizon, and the specific property market.

Frequently Asked Questions

How does negative gearing work in Australia?

Negative gearing occurs when the costs of owning an investment property — mortgage interest, management fees, maintenance, insurance, and depreciation — exceed the rental income. The resulting net rental loss is deducted from your other assessable income (salary, wages), reducing your taxable income and your tax bill. The tax saving equals the rental loss multiplied by your marginal tax rate. Use the Negative Gearing Calculator to calculate your exact saving.

What is the negative gearing tax saving?

The tax saving depends on your marginal rate and the size of your rental loss. At 30%: $3,000 per $10,000 loss. At 37%: $3,700 per $10,000 loss. At 45%: $4,500 per $10,000 loss. Depreciation amplifies the benefit because it adds to your deductible loss without requiring a cash outgoing.

What did the 2026 Budget change about negative gearing?

From 1 July 2027, rental losses on established residential properties purchased after 12 May 2026 will be quarantined — they can no longer be offset against salary or wages, only against future rental income. Properties purchased before 12 May 2026 are fully grandfathered and unaffected. New builds retain full negative gearing treatment regardless of when purchased.

Is negative gearing abolished in Australia?

No. Negative gearing has not been abolished. The May 2026 Budget changes quarantine losses on new purchases of established residential properties from 1 July 2027 — but grandfathered properties (bought before 12 May 2026) and all new builds retain full negative gearing treatment. The concept and mechanism remain in place.

What are quarantined losses under the 2026 Budget?

Quarantined losses are rental losses that cannot be offset against salary income — they can only offset future rental income. Under the Budget changes, established properties purchased after 12 May 2026 will have their rental losses quarantined from 1 July 2027. The losses are not eliminated — they accumulate and reduce tax when the property generates future rental profit or when the property is sold (as a deduction against the capital gain).

Is negative gearing worth it in 2026?

For properties purchased before 12 May 2026 and for new builds — yes, if your marginal rate is 30% or above and the property has strong capital growth fundamentals. For established properties purchased after 12 May 2026, the quarantining of losses from 1 July 2027 significantly reduces the annual tax benefit, making the math considerably tighter. In these cases, positive cash flow or neutral gearing on a high-growth asset becomes the more defensible strategy.

What is the difference between negative gearing and depreciation?

Negative gearing refers to the overall tax position — when total deductions exceed rental income, producing a loss offset against salary. Depreciation is one component of those deductions — a non-cash deduction for the wear and tear of the building (Div 43) and its fittings (Div 40). Depreciation is the most powerful component because it increases your rental loss without requiring any cash outgoing, amplifying the tax saving beyond what the cash expenses alone would produce.

This article is general information only and does not constitute financial, tax, or legal advice. Negative gearing rules changed significantly in the May 2026 Federal Budget. Always verify your specific situation with a registered tax agent or financial adviser before making investment decisions.