Negative Gearing Explained: How It Works in Australia, and What the 2026 Budget Changed

Negative Gearing Explained: How It Works in Australia, and What the 2026 Budget Changed

Negative gearing did not disappear in 2026, but it did split in two. What it is, how the arithmetic actually works, and the same property worked through under the old treatment and the new, from a broking desk that runs these numbers every week.

Few phrases in Australian money talk carry more baggage than negative gearing, and few are explained less often. This guide does the explaining: the plain English definition, what the 2026 Budget actually changed, and one property worked through twice, once under the old treatment and once under the new, using the current ATO marginal tax rates. If you are weighing a purchase, the step-by-step process sits in our guide to buying an investment property in 2026, and the full list of what an investor can claim is in our 2026 deductions map. None of this is tax advice: speak to your accountant about your own position.

What is negative gearing?

Gearing simply means borrowing to invest. A property is negatively geared when the costs of owning it, mainly the loan interest plus expenses like management fees, council rates, insurance and maintenance, add up to more than the rent it earns, so the property runs at a loss. Positive gearing is the reverse: the rent more than covers the costs, and the surplus is taxable income.

Under the treatment that applied for decades, an individual investor could deduct that rental loss against other income, most commonly salary, which reduced the tax paid in that year. The loss itself never went away: negative gearing softened it, it did not erase it. Investors accepted the annual shortfall because they expected capital growth over the years to outweigh it, with the tax treatment easing the carrying cost along the way.

Two things follow from the definition that are worth fixing in place before the 2026 changes make sense. First, gearing is a description of cash flow, not a strategy in itself: the same property can drift from negatively to positively geared as rents rise or the loan shrinks. Second, the deductions that create the loss are ordinary landlord deductions, interest, fees, rates, insurance and the rest, and they are mapped item by item in our investment property deductions guide. These are definitions, not advice: speak to your accountant about how either treatment applies to your situation.

What changed in the 2026 Budget?

The Federal Budget announced on 12 May 2026 contains the most significant change to property investment taxation in decades, and it works like a switch thrown at a precise moment. For established properties purchased after 7:30pm AEST on 12 May 2026, rental losses can no longer be deducted against salary: they are quarantined and carried forward against future rental income or capital gains. From 1 July 2027, negative gearing on residential property applies only to new builds. Properties owned on or before 12 May 2026 are grandfathered and continue exactly as before, until they are sold.

The most misunderstood part deserves its own sentence: the changes removed no deductions. Interest still claims, rates still claim, depreciation still claims, and rental profits are taxed as before. What moved is what happens when the claims exceed the rent, a split our deductions guide calls claims stayed, timing moved. Every property you inspect now falls into one of three tax worlds:

The stated policy intent is to channel investment into new housing supply, which is why the new build and established markets are now two distinct investment propositions. The same Budget package also proposed replacing the 50 per cent capital gains tax discount with CPI indexation of the real gain, with new builds keeping the existing discount. And one status note matters for anyone making decisions this year: the legislation had not passed Parliament at the time of writing, though several lenders have already moved ahead of it, which is covered in the borrowing power section below. How any of this lands on your own return is a matter for your accountant: speak to your accountant before acting on it.

Worked example: the old treatment

Numbers make the mechanics honest, so here is one property, worked through twice. Everything below is a simplified illustration on stated assumptions, not advice or a prediction: the figures are chosen to make the arithmetic clear, and your own numbers, including depreciation and the fine print of what claims, belong with your accountant.

Take the same property our step-by-step investment guide uses: a $650,000 established townhouse renting at $600 a week, which is $31,200 a year in rent, a gross yield of 4.8 per cent. Suppose the interest on the investment loan comes to $32,800 for the year, and the other deductible costs, management fees, council rates, insurance and maintenance, add a further $9,200. Total deductions: $42,000 against $31,200 of rent.

The property runs at a loss of $10,800 for the year. Under the old treatment, that loss is deducted against salary. Say the investor earns $160,000: on the ATO resident tax rates for 2026 to 2027, income between $135,001 and $190,000 is taxed at 37 cents in the dollar, so a $10,800 deduction reduces tax by $10,800 times 37 per cent, which is $3,996. The ATO table excludes the 2 per cent Medicare levy, which is one more reason the precise figure belongs with your accountant.

So the real annual cost of holding the property is $10,800 less $3,996: $6,804 out of pocket, roughly $131 a week. That is negative gearing under the old treatment in one sentence: the investor still loses money every year, but the tax system returns part of the loss in the same year it happens, and the bet is that capital growth eventually outruns the rest. Speak to your accountant before treating any of these figures as your own.

Worked example: the same property under the new rules

Now run the identical property under the announced rules, as an established purchase settled after 7:30pm AEST on 12 May 2026. Nothing about the property changes: rent is still $31,200, deductible costs are still $42,000, and the loss is still $10,800. Every one of those deductions still exists and still counts. What changes is where the loss goes.

Instead of reducing this year’s salary tax, the $10,800 is quarantined: banked and carried forward, able to offset future rental profits or the capital gain when the property is eventually sold. This year, the investor covers the full $10,800 shortfall, roughly $208 a week, from their own pocket, with the tax relief deferred rather than arriving in their pay.

Quarantined does not mean lost. Over the full life of the investment, the losses still do work: they reduce future rental profits, or the taxable gain when the property is sold. What the change really moves is cash flow along the way, and cash flow is exactly what stretched households feel first. A property that costs $131 a week to hold is a different proposition from the same property at $208 a week, which is why established properties are increasingly judged on yield first, and why buyers now stress test the full shortfall against their income before offering. The carry-forward mechanics for your own return are a matter for a registered tax professional: speak to your accountant.

Who is affected, and who is not

The announced rules draw their lines by date and by property type, so the who question has unusually clean answers:

• Existing investors are not affected while they hold. Anything owned on or before 12 May 2026 is grandfathered and continues exactly as before, until it is sold. For these holdings the annual review that matters most is the loan itself, which is where our guide to refinancing an investment property loan comes in.
• Buyers of established property after 7:30pm AEST on 12 May 2026 are affected in full. The rental loss is quarantined, the household carries the whole shortfall each year, and the tax relief arrives later. The honest test before buying is whether your household carries the full stressed shortfall comfortably.
• Buyers of new builds are the carve-out. From 1 July 2027, negative gearing on residential property applies only to new builds, so rental losses on a new build can still offset salary under the announced rules.
• Edge cases exist, and they are not broker territory. Where a substantially renovated property sits, how the rules treat contracts signed near the cutoff, and anything touching your own return are questions for your accountant: speak to your accountant before you rely on a category.

One practical consequence follows for anyone choosing between the two markets: the decision between a new build and an established property is now a tax decision as well as a property decision, and it belongs early in the process, not after the auction. Our step-by-step investment guide places it at Step 3 for exactly that reason.

What it means for your borrowing power

The least reported consequence of the 2026 changes has nothing to do with tax returns: it lives in lender serviceability calculators. Several lenders have already removed the negative gearing benefit from their borrowing capacity calculations for new purchases of established property, ahead of the legislation passing. The practical effect is blunt: same salary, same property, less borrowing power than the year before, because the calculator no longer assumes the tax system will subsidise part of the shortfall.

How much less depends on income, bracket and portfolio, and it varies lender by lender, which is precisely why the lender you approach now matters more for investors than it has in years. The full breakdown, including which banks moved first and what happens to pre-approvals, is in our analysis of what the negative gearing changes do to borrowing capacity. If you are planning a purchase in either market, the practical move is to have your borrowing power tested against current lender policy before you inspect anything, not after.

The honest part: a loss is still a loss

Negative gearing is a cash-flow position, not a goal, and it was never free money under either era’s rules. A rental loss is real money leaving your account every week, and the tax treatment only ever returned part of it: in the worked example above, the old treatment gave back 37 cents of each lost dollar, and the investor still wore the other 63. Buying a bad property because the loss is deductible was a losing trade before the 2026 Budget, and it remains one after it.

What the new rules genuinely change is discipline. For established purchases after the cutoff, the full shortfall lands on the household budget in the year it happens, so the property has to justify itself on yield and quality now, with the tax relief a deferred footnote rather than an annual rebate. That is a higher bar, and honestly, it is the bar good investors were already using. If a property only made sense because of the tax treatment, it never made sense. The arithmetic that decides whether a purchase stands, rent against costs, stressed and unsubsidised, is the arithmetic worth running first, and the tax overlay belongs with your accountant: speak to your accountant before you commit either way.

Frequently asked questions

What is negative gearing in simple terms?

Negative gearing is when the costs of owning an investment property, mainly the loan interest plus expenses like management fees, council rates, insurance and maintenance, add up to more than the rent it earns, so the property runs at a loss. Positive gearing is the reverse: the rent more than covers the costs and the surplus is taxable income.

Is negative gearing being abolished in Australia?

Not across the board. Under the changes announced in the May 2026 Budget, established properties purchased after 7:30pm AEST on 12 May 2026 have rental losses quarantined rather than deducted against salary, while from 1 July 2027 negative gearing on residential property applies only to new builds. Properties owned on or before 12 May 2026 keep the old treatment. The legislation had not passed Parliament at the time of writing.

What does it mean that rental losses are quarantined?

Quarantined does not mean lost. The loss is banked and carried forward, and it can offset future rental profits or the capital gain when the property is eventually sold. What changes is the cash flow along the way: the shortfall comes out of your pocket in full each year, with the tax relief deferred instead of arriving in your pay. Speak to your accountant about how carried-forward losses would apply to you.

Am I affected if I already own an investment property?

Under the announced rules, no. Anything you owned on or before 12 May 2026 is grandfathered and continues exactly as before, until you sell. The changes apply to established properties purchased after 7:30pm AEST on 12 May 2026, and from 1 July 2027 negative gearing on residential property applies only to new builds. Your own position is a matter for your accountant.

Do new builds still get negative gearing?

Yes. Under the announced rules, new builds keep negative gearing: from 1 July 2027, negative gearing on residential property applies only to new builds, so rental losses on a new build can still offset salary. The stated policy intent is to channel investment into new housing supply, which is why the new build and established markets are now two distinct investment propositions.

Is negative gearing still worth it?

Negative gearing is a cash-flow position, not a goal. A rental loss is real money leaving your account, and the tax treatment only ever returns part of it, so the strategy stands or falls on the quality of the property behind it. Whether it suits you depends on your income, your buffers and the property itself: run the numbers with your accountant and be honest about the years of shortfall.