The Pros and Cons of Negative Gearing for Investors

Negative gearing still works for some investors, but the rules now depend on when you bought and what you bought. Before you sign a contract, check which side of the 12 May 2026 date your property sits on, because that decides whether your rental loss can reduce your salary income.

Negative gearing means your rental costs, including loan interest, are higher than the rent you collect. The loss may be used for tax purposes in some cases. It is a tax outcome, not a goal on its own, and a talk with your accountant should come before any buying decision.

How Does Negative Gearing Work on an Investment Loan?

Negative gearing happens when the costs of holding a rental property, mostly loan interest, are more than the rent it earns. The net rental loss may then be deducted against other income, depending on the rules that apply to that property.

Interest on money borrowed to buy or hold a rental property is deductible to the extent the property is rented or available for rent. Only the interest part of a principal and interest repayment is deductible. The principal part is a repayment of capital, so the full repayment is not a deduction. Costs like council rates, insurance, property management fees, repairs and depreciation can also be deductible. Your accountant can confirm what applies to you.

A lower tax bill never makes a loss profitable. You are still out of pocket for part of every dollar lost, so you are relying on the property rising in value over time.

What Changed With Negative Gearing in 2026?

The rules now split into three groups, depending on when you acquired the property and whether it is a new build. These rules are in force under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

• Properties you held at 7:30pm AEST on 12 May 2026, including those under contract awaiting settlement, keep full negative gearing until the property is sold.
• Eligible new builds acquired after that date can still be negatively geared against all income.
• Established properties bought after that time can be negatively geared under current rules until 30 June 2027. From the 2027-28 income year, the net rental loss can only be used against other residential property income, including residential capital gains. Excess losses can be carried forward.

Eligible new builds include homes built on previously vacant land, and homes that replace an existing property where the number of dwellings goes up. Knock-down rebuilds that add no extra homes, and major renovations, do not count. A new build that is lived in for more than 12 months before sale to a later investor loses access for that later buyer.

Pros of Negative Gearing

The main advantage is that a deductible loss can soften the cash cost of holding a growth-focused property. For properties that still qualify, the loss can reduce your taxable salary income, subject to your own tax position.

It also lets you hold an asset for the long term while your rent covers part of the cost. Many investors use this to build wealth through capital growth. The final capital gain is where the strategy needs to pay off, and it is not certain.

Cons of Negative Gearing

The main drawback is that you carry a real cash loss every year, and you only recover part of it through tax. If rates rise, the property sits vacant or repairs hit, that loss grows and your tax deduction does not cover it.

The new rules add another cost. For established properties bought after 12 May 2026, a loss from the 2027-28 income year can no longer reduce your wage income. It builds up and waits for future residential income or gains. Property prices can also fall, which leaves you with both the cash loss and a lower value.

Capital gains rules are changing too. The 50 per cent CGT discount continues for gains accruing before 1 July 2027. From that date, the discount is replaced by CPI indexation and a 30 per cent minimum tax rate on the real gain accruing after that date. Talk to your accountant about how this affects your sale plans.

Can You Still Borrow Enough for a Negatively Geared Property?

Lenders assess your ability to repay at a buffered rate. How they treat rental losses and any tax effects depends on each lender's policy, so ask a broker how each lender treats them. Banks regulated by APRA must test your repayments at a rate at least 3 percentage points above the loan rate, so a negatively geared loan has to pass that test on your income.

Most lenders count only part of the rent you expect to receive. APRA's guidance suggests counting no more than 80 per cent of expected rent, which allows for periods without a tenant. Rent from a rental appraisal is also usually trusted less than rent from an existing tenancy. Non-bank lenders sit outside some of these APRA rules, and a broker can compare both types. See our page on borrowing capacity for more on how lenders assess income.

Interest Only or Principal and Interest for a Negatively Geared Loan?

Interest-only repayments keep your cash cost lower for the interest-only period, but they do not reduce the loan balance. Principal and interest repayments cost more each month and build equity as the debt falls.

Interest-only does not lift your borrowing power. Lenders assess an interest-only loan on principal and interest repayments over the remaining term, so a 30-year loan with a 5-year interest-only period is tested over 25 years. Interest is deductible under both structures, but only the interest part of a principal and interest repayment counts.

Here is an illustrative example at 6.75 per cent p.a. Consider a $600,000 investment loan. Interest-only repayments would be about $3,375 a month, because $600,000 x 6.75% = $40,500 a year. Over a 30-year principal and interest term, the repayment is about $3,892 a month. If the loan has 5 years interest-only and then reverts, the later repayment is calculated over 25 years and comes to about $4,145 a month. That is roughly $770 a month more than the interest-only repayment. The trade-off is a higher repayment later and no reduction in debt in the meantime. Use our mortgage repayment calculator to test your own numbers.

Using Equity to Buy Without Losing the Deduction

Borrowing against equity does not automatically make the interest deductible, because the deduction depends on what you do with the money. If you use funds from an investment loan for a private purpose, such as a holiday, that interest is not deductible.

The ATO treats each redraw or drawdown as a separate borrowing, based on how the funds are used. As an example, an investor who releases equity to cover the deposit on a second rental property would generally be borrowing for an income-producing purpose, while an investor who also pulls out money for a car would create a private-purpose portion. Splitting these borrowings into separate loan accounts keeps the records clear for your accountant. A borrowing above 80 per cent of the property value generally needs Lenders Mortgage Insurance, which adds a cost.

Our investment loans page explains how we compare structures across lenders.

Is Your Current Loan Still Suited to Your Property?

If your property was held before 12 May 2026, your loss deductions continue until you sell, so the structure of your loan matters for the long haul. It can pay to ask your lender whether your rate or structure is still competitive. A loan health check can show whether refinancing to a different lender or structure suits you.

If you are struggling to meet repayments, you can tell your lender about hardship verbally or in writing. Lenders have set timeframes to respond, and you can contact the Australian Financial Complaints Authority if you are unhappy with the outcome.

Call one of our team or book an appointment at a time that works for you, and we will go through your numbers with you.

Frequently Asked Questions