Negative gearing, explained (Australia)

Few phrases in Australian finance are as loaded — or as misunderstood — as "negative gearing". It's been a third rail of federal politics for the better part of a decade: floated, modelled, abandoned, and weaponised at three separate elections. So before we say anything about where the policy is heading, let's be precise about what the thing actually is, because most arguments about it are really arguments about something else.

What negative gearing actually is

An investment is "geared" when you've borrowed to buy it. It's negatively geared when the income it produces doesn't cover the cost of holding it — so it runs at a loss. For a rental property, that means the rent you collect is less than the deductible costs of owning it: loan interest, council rates, insurance, property management, repairs, and depreciation on the building and fittings. Interest is usually the big one.

Here's the part that makes it powerful. Under Australia's tax rules, that net rental loss isn't quarantined to the property — you can deduct it against your other taxable income, including your salary. So a loss-making rental directly reduces the tax you pay on your wages. The higher your marginal tax rate, the more each dollar of loss is worth to you. That's negative gearing in one sentence: borrow to buy an asset that loses money on paper, and use the loss to shrink your overall tax bill while you wait for the price to rise.

A worked example

Take an investor on a 37% marginal tax rate who buys a $700,000 rental and borrows most of it. Round numbers, illustrative only:

• Rent received: $26,000 a year.
• Loan interest: $32,000 a year (the big cost).
• Other cash costs — rates, insurance, management, maintenance: $7,000.
• Depreciation (a non-cash deduction on the building and fittings): $5,000.
• Total deductible costs: $44,000. Rent of $26,000 minus $44,000 = a $18,000 net loss.

That $18,000 loss comes off the investor's taxable income. At a 37% marginal rate (plus the Medicare levy), the tax saving is a little over $6,600 — so the real out-of-pocket cost of holding the property is the cash shortfall reduced by that refund. Notice that $5,000 of the loss is depreciation, which isn't money leaving your pocket this year — it's a paper deduction that makes the loss (and the refund) bigger than the actual cash gap. That's the engine: the taxpayer effectively co-funds the holding cost while the investor bets on capital growth.

The CGT discount is the other half of the deal

Negative gearing rarely makes sense on its own — you're deliberately losing money each year. What makes the strategy work is the payoff at the end: the capital gain when you sell. And here Australia has, since 1999, offered a second concession. If you've held an asset for more than 12 months, only half the capital gain is taxed — the 50% CGT discount.

Stack the two together and the logic is elegant, if you're the investor: you deduct the holding losses each year at your full marginal rate, then pay tax on only half the eventual gain. You're getting full-rate relief on the way in and a half-rate bill on the way out. Critics argue this combination is what turbocharges investor demand for existing housing and bids prices beyond what owner-occupiers — who get neither concession — can match. Defenders argue it keeps rental supply flowing and that losses are a normal feature of any investment. Both things can be partly true, which is exactly why the debate never dies.

So what's actually changing? (And what hasn't)

Let's be scrupulous here, because this is the exact spot where commentary tends to outrun the facts. As of mid-2026, negative gearing as most Australians know it is still in force. What changed is that, after years of Treasury modelling and political tiptoeing, the Albanese government — returned at the 2025 election — used the 2026–27 Budget to announce that it intends to wind negative gearing back. That announcement is now a Bill working its way through Parliament. It is not yet enacted law, and Labor needs Senate support to pass it.

As announced, the proposed reform has a specific shape. From 1 July 2027, negative gearing for residential property would be limited to new builds. Losses on established (existing) homes bought after 7:30pm AEST on 12 May 2026 — Budget night — could only be deducted against rental income or capital gains from residential property, not against your salary. In the same package, the government announced replacing the 50% CGT discount with cost-base indexation plus a minimum 30% tax on gains, also from 1 July 2027. The stated rationale: more than 80% of new investor lending goes to existing homes, and the government wants to steer that money toward building new supply.

Common reform shapes — so you can read the debate

Over the years, reformers have floated several different ways to wind negative gearing back. Knowing the menu helps you cut through the noise, because any future change will be some combination of these:

• Limit it to new builds only — the shape the current Bill takes. Investors can still negatively gear newly built dwellings (to spur supply) but not established homes.
• Grandfather existing investors — leave current arrangements untouched for properties already owned, so the change only bites on future purchases. The current proposal does this.
• Cap or quarantine the deduction — let losses only offset other investment income (or a capped amount), not your wages, so the loss can't shrink the tax on your salary.
• Pair it with CGT-discount reform — most serious proposals tighten the 50% discount at the same time, since the two concessions work as a pair.

Who wins and who loses if it's wound back

Here's where we'll plant our flag. Strip the policy down and the effect of narrowing negative gearing is reasonably predictable: less investor demand for established homes, which takes some heat out of price growth at the margin. That is, in our editorial opinion, broadly good for the people currently locked out and broadly tough for the people relying on the concession to make the sums work on a new purchase. It is not a free lunch — there are real losers, and pretending otherwise is how this debate goes bad.

Our net take, stated plainly: winding back negative gearing would be a big deal for the property industry and would likely dampen investor-driven price growth. That's arguably healthy for first-home buyers and younger Australians trying to get a foot on the ladder, and it's tough on new investors who lose a genuine cashflow lever. Good for FHBs, hard on new investors. Reasonable people weigh those two effects differently — and the rent-supply question in the bottom row is the one we'd hold most loosely, because the evidence cuts both ways.

If the strategy you knew is changing

If the proposal becomes law, the established-home-plus-salary-deduction playbook narrows considerably for anyone buying from here on. It's worth remembering that negatively geared property was only ever one route to building wealth, and a fairly specific one: it leans on leverage, on a particular tax treatment, and on a single, illiquid, undiversified asset.

As a general illustration only, some people build wealth through more diversified, lower-friction assets — for instance broad-based ETFs — that don't depend on negative gearing or property leverage at all. That's not a recommendation, not a comparison of returns, and not a suggestion to buy anything; it's simply a reminder that property's tax structure is one path among several, and which (if any) suits you depends entirely on your own circumstances. Talk to a licensed adviser before acting on any of it.

Whatever the rules end up being, the number that actually decides whether a property works for you is its gearing position — rent in, minus interest and holding costs. That's exactly the line Kleev computes for any property you add: it reads your real transactions, separates loan interest from principal, and shows you the monthly gearing figure (and what's deductible) instead of leaving you to guess. See your own property's gearing in Kleev →