When to Use Negative Gearing on Investment Property

Negative gearing lets you offset rental property losses against your salary or other income, reducing your tax bill while you hold an asset that may grow in value over time.

For property investors in Carlton, negative gearing has been a cornerstone strategy for decades. The suburb sits roughly 17 kilometres south of the Sydney CBD, bordered by Kogarah Bay to the west and the Georges River to the south. Carlton's mix of older-style units, townhouses and newer apartment developments draws a steady stream of renters, particularly young professionals and families who want proximity to amenities without inner-city price tags. Vacancy rates in the St George area have typically sat below the Sydney metro average, which helps with rental income consistency, but holding costs including council rates, strata levies and loan repayments can still outpace what you collect in rent, especially in the first few years of ownership.

That shortfall is where negative gearing comes in. You borrow to buy the property, the interest expense exceeds the rent, and you claim the loss against your taxable income. The banks have always priced investment loans differently from owner-occupied lending because the risk profile is different, and the tax system has treated rental property losses as deductible since the 1930s. But the rules changed in mid-2026, and whether negative gearing still works for you depends entirely on when you bought, what you bought, and how long you plan to hold.

How Negative Gearing Works in Practice

You borrow money to buy a rental property. The interest on that loan, along with other holding costs such as insurance, property management fees, council rates, strata levies and repairs, are deductible against your assessable income to the extent the property is rented or genuinely available for rent.

Consider an investor who bought a two-bedroom unit in Carlton in early 2026. They're earning $110,000 a year as a teacher. The unit cost them $670,000, they put down a 20 per cent deposit, and borrowed $536,000 on a variable rate. Annual interest at current variable rates is running around $28,000. Strata levies are $4,200 a year, council rates $1,400, insurance $900, property management fees $2,600, and they spent $1,500 on minor repairs after the tenant moved in. Total deductible expenses are roughly $38,600. Rent is $560 a week, or $29,120 a year. The property is negatively geared by about $9,480.

That $9,480 loss is deductible against the investor's salary. At a marginal tax rate of 32.5 per cent plus the Medicare levy, the tax saving is around $3,320. The actual out-of-pocket cost after tax is closer to $6,160 for the year. The investor is paying to hold the property, but the tax system is sharing part of that cost. Over time, rents may rise, the loan balance reduces if they're paying principal and interest, and the property may increase in value. The loss narrows, the portfolio builds equity, and when they eventually sell, the capital gain is taxed at concessional rates if they've held for more than 12 months.

That's the traditional model. It assumes the property increases in value, the loss is temporary, and the tax deduction makes the holding period affordable. It also assumes you're earning enough other income to absorb the loss in the first place. If your taxable income is too low, the deduction has little value because you're already paying minimal tax.

What Changed in May 2026

From the 2027-28 income year, losses from established residential investment properties bought after 7:30pm AEST on 12 May 2026 can only be offset against income from other residential properties, including capital gains on residential property. You can no longer offset those losses against your salary, business income, or income from other asset classes.

Properties you already owned at 12 May 2026, or properties you had under contract at that time, are grandfathered. You can keep deducting losses against all income until you sell. New builds are also exempt. If you buy an eligible newly constructed dwelling after 12 May 2026, losses can still be offset against your wage or salary. The definition of a new build is strict. It must be a dwelling constructed on previously vacant land, or a dwelling that replaced an existing property and increased the total number of dwellings on the site. Knock-down rebuilds that don't add to the dwelling count, and substantial renovations, don't qualify.

For Carlton investors, this split matters. Most of the housing stock in Carlton is established. The suburb developed steadily from the 1960s onward, with a mix of fibro cottages, brick units and walk-up blocks. Newer apartment developments have appeared near the Carlton train station and along Princes Highway, but the majority of transactions involve existing dwellings. If you're buying an established unit in Carlton today, any rental loss from 1 July 2027 onward can only be used against other residential property income. If you don't have other residential property income, the loss is quarantined and carried forward. You can use it in future years when you do have residential property income, including when you sell and realise a capital gain.

This doesn't kill negative gearing. It changes who benefits and when. If you're a salaried investor buying your first property and you don't own other residential assets, the immediate tax benefit is gone. The loss still exists, it's still deductible, but you have to wait to use it. If you already own multiple properties or you're planning to build a portfolio over time, the deduction still flows, just within a narrower pool of income.

When Negative Gearing Still Makes Sense

Negative gearing makes sense when the tax benefit is immediate and the capital growth assumption is realistic.

If you bought before 12 May 2026, you're still operating under the old rules. Losses offset your salary. The deduction reduces your after-tax holding cost, and as long as you believe the property will increase in value over the medium to long term, the strategy is unchanged. Carlton's proximity to transport, schools, parkland and the Georges River has historically supported steady demand. The suburb is serviced by Carlton station on the T4 Eastern Suburbs and Illawarra Line, with express services to Central in under 30 minutes. Rental demand has been consistent, and while capital growth isn't linear, the long-term trend in the St George area has been upward.

If you're buying a new build after 12 May 2026, you still have access to the full deduction. New builds in Carlton are limited, but when they do appear, they're typically townhouse developments or low-rise apartment blocks on consolidated sites. The tax treatment is identical to the old rules. Losses offset all income. You also benefit from higher depreciation deductions in the early years, which can increase the size of the loss and therefore the tax saving.

If you already own one or more investment properties and you're looking to add another, the new rules don't block you. Your losses offset income from your existing properties, including rent and capital gains. In our experience, investors with two or more properties are often cash flow neutral or positive across the portfolio even if individual properties are negatively geared. The quarantining doesn't hurt them because they have residential property income to absorb the loss.

Interest-Only Loans and Borrowing Capacity

Most investors structure their investment loans as interest-only for the first few years. You're not required to pay down principal during the interest-only period, which keeps repayments lower and maximises the deductible interest expense.

Interest-only repayments are typically several hundred dollars a month lower than principal and interest on the same loan amount. That difference can determine whether the property is cash flow neutral or heavily negatively geared. It also affects your borrowing capacity. The banks assess your ability to service the loan at a rate at least 3 percentage points above the actual loan rate. If you're applying for a $500,000 loan at a 6.5 per cent variable rate, the bank tests you at 9.5 per cent. On an interest-only loan, the repayment at 9.5 per cent is around $3,958 a month. On a principal and interest loan, it's around $4,400. The difference flows through to how much you can borrow.

Interest-only periods are typically five years. After that, the loan reverts to principal and interest unless you apply to extend. The banks tightened their approach to interest-only extensions over the past few years, and they now treat long-term interest-only loans as higher risk under the prudential standards. If the loan to value ratio is above 80 per cent and the interest-only period is longer than five years or is unspecified, the loan is classified as non-standard, which increases the capital cost for the lender and usually means the lender won't approve it.

For Carlton investors, the decision between interest-only and principal and interest is partly about cash flow and partly about strategy. If you're planning to hold long-term and build equity, paying down principal makes sense. If you're focussed on maximising tax deductions and preserving capital for other investments, interest-only may suit you during the early years. You should also consider what happens when the interest-only period ends. Your repayments will jump. If you're not prepared for that, refinancing might be necessary, and refinancing always involves costs and reassessment of your income and serviceability.

Borrowing Limits and the Debt-to-Income Cap

From 1 February 2026, the banking regulator introduced a debt-to-income lending limit. Each bank can lend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. The limit applies separately to investor lending and owner-occupier lending.

If your total borrowing across all home loans is six times your gross annual income or more, you fall into that 20 per cent bucket. The bank can still lend to you, but you're competing for a smaller allocation. In practice, this means borrowers with very high DTI ratios face closer scrutiny, and some lenders may decline applications that would have been approved a few years ago.

For an investor earning $120,000 a year, a DTI of six times income means total borrowing of $720,000. If they already have a $400,000 home loan and they're applying for a $350,000 investment loan, their total debt is $750,000, which is 6.25 times income. They're above the threshold. That doesn't mean they'll be declined, but it does mean the lender will assess the application more carefully, the pricing may be less sharp, and if the lender has already approved a large number of high-DTI loans that quarter, the application may be knocked back.

We regularly see investors who assume they can borrow the same multiple for an investment property as they did for their home. That assumption breaks down once you factor in rental income at a discount, higher interest rates on investor loans, and the DTI cap. Rental income is typically shaded by at least 20 per cent for serviceability purposes, meaning if the property generates $30,000 a year in rent, the bank treats it as $24,000. The shortfall between rental income and loan repayments has to be covered by your other income, which reduces how much you can borrow overall.

Carlton Market Characteristics and Rental Yield

Carlton's housing stock is weighted toward units and townhouses. Detached houses exist but are relatively scarce and generally priced above the suburb median. The unit market is split between older walk-up blocks from the 1970s and 1980s, and newer developments from the past two decades.

Rental yields in Carlton and the wider St George area have historically sat in the mid-3 to low-4 per cent range for units, depending on the age, condition and proximity to transport. Yields are higher for older stock, but holding costs including strata levies and maintenance are also higher. Newer apartments often come with lower maintenance costs in the early years and higher depreciation deductions, but the purchase price is typically higher relative to rent, which compresses yield.

A two-bedroom unit in Carlton priced at $650,000 and renting for $550 a week generates a gross yield of around 4.4 per cent. After deducting strata levies, council rates, insurance, property management fees and an allowance for vacancy and maintenance, the net yield drops to roughly 2.5 to 3 per cent. If the investor is borrowing at 6.5 per cent, the property is negatively geared from day one. Rental growth and capital growth are doing the heavy lifting, not cash flow.

This is typical for investment property in Sydney's middle-ring suburbs. You accept the negative cash flow because you're banking on long-term price appreciation and building equity through a combination of debt reduction and market movement. The tax deduction softens the cash flow pain, but it doesn't eliminate it. You're still funding the shortfall every month.

Claimable Expenses and Record Keeping

Interest on the investment loan is deductible. So are council rates, strata levies, insurance, property management fees, repairs and maintenance, depreciation on the building and fixtures, and certain other costs such as pest control, gardening and utilities if you're paying them between tenancies.

Loan establishment fees and LMI premiums are also deductible, but they're treated as capital costs and claimed over five years or the life of the loan, whichever is shorter. If you paid $12,000 in LMI when you took out the loan, you claim $2,400 a year for five years, not the full $12,000 in year one.

Repairs are deductible in the year you incur them. Improvements are not. A repair restores something to its previous condition. An improvement enhances or replaces it. Fixing a broken tap is a repair. Replacing the entire bathroom is an improvement. Improvements are added to the property's cost base and claimed through depreciation or factored into the capital gains tax calculation when you sell.

The distinction matters because the ATO audits rental property deductions regularly, and the most common error is overclaiming repairs. If you're not sure whether something is a repair or an improvement, ask your accountant before you lodge. The second most common error is claiming expenses for periods when the property wasn't rented or genuinely available for rent. If the property sat vacant for three months because you were renovating, or because you let a family member live there rent-free, you can't claim holding costs for that period.

You need to keep records for five years after you lodge each return. Bank statements, invoices, receipts, loan documents, strata levy notices, rental statements from your property manager, and a logbook if you're claiming any travel related to inspecting or maintaining the property. The ATO has access to data from banks, state revenue offices, and property managers. They know when you bought, how much you borrowed, and how much rent was paid into your account. If your deductions don't match the data, you'll be asked to explain.

Capital Gains Tax and the 2027 Rule Change

When you sell an investment property, you pay capital gains tax on the profit. If you've held the property for more than 12 months, you receive a 50 per cent discount on the capital gain under the current rules. The discount applies to gains accruing up until 30 June 2027.

From 1 July 2027, the 50 per cent discount is replaced by cost base indexation and a 30 per cent minimum tax rate on the real gain. You index the cost base of the property in line with inflation and pay tax only on above-inflation profits. For properties bought before 1 July 2027 and sold after that date, gains are split. The portion accruing before 1 July 2027 is taxed under the old rules. The portion accruing from 1 July 2027 onward is taxed under the new rules. You can either get a market valuation as at 1 July 2027 or use the ATO apportionment formula.

If you bought an eligible new build, you have a choice at the time of sale. You can use the old 50 per cent discount method or the new indexation and minimum rate method, whichever gives you a lower tax outcome.

For most investors, the new rules are unlikely to result in a higher tax bill unless inflation is very low and the property has grown strongly in nominal terms. The indexed cost base removes the inflation component of the gain, and the 30 per cent minimum rate only applies if your effective tax rate on that portion of the gain is below 30 per cent. If you're earning a high income and your marginal rate is 37 per cent or 45 per cent, the minimum rate doesn't affect you. If you're retired and your marginal rate is 19 per cent, the minimum rate pushes your tax on the indexed gain up to 30 per cent, but only on the post-June 2027 portion.

The real impact is on how you model the after-tax return. You need to factor in both the loss quarantining from 2027-28 onward if you bought after 12 May 2026, and the CGT change from 1 July 2027. The two changes interact. If your losses are quarantined and carried forward, they'll offset the capital gain when you sell, which reduces the taxable gain and therefore the tax payable. But if the gain is small or the holding period is short, you may not have enough gain to absorb all the carried-forward losses, and the benefit is deferred again.

Call one of our team or book an appointment at a time that works for you. We'll walk through your circumstances, compare investment loan options from lenders across Australia, and show you exactly how the numbers work for the property and the timeframe you're targeting.

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