Negative Gearing Australia 2025-26: Complete Investor Guide
Around 2.2 million Australians own investment property, and over a million report a rental loss each year. Negative gearing — the ability to offset that rental loss against salary and other income — is the tax feature that makes the maths work. This guide covers what qualifies, what doesn't, how the tax saving scales with your marginal rate, and the planning moves that separate sophisticated investors from accidental landlords.
Mechanically, it's straightforward. Australia allows taxpayers to deduct the expenses of earning assessable income. If you earn $30,000 of rent and spend $45,000 on loan interest, rates, insurance, and management, you have a $15,000 rental loss. That loss reduces your assessable income from other sources — salary, business profit, interest income — lowering your total tax bill for the year.
There are three categories of deductible expense:
Your marginal tax rate determines the size of the benefit. Higher earners get larger tax savings from the same rental loss.
| Taxable income | Marginal rate (+ Medicare) | Saving per $10k loss | Saving per $20k loss |
|---|---|---|---|
| $0 – $18,200 | 0% + 0% | $0 | $0 |
| $18,201 – $45,000 | 16% + 0% | $1,600 | $3,200 |
| $45,001 – $135,000 | 30% + 2% | $3,200 | $6,400 |
| $135,001 – $190,000 | 37% + 2% | $3,900 | $7,800 |
| $190,001+ | 45% + 2% | $4,700 | $9,400 |
The concentration effect: a high-income professional earning $250,000 on the top bracket saves $4,700 on every $10k of rental loss. A public servant on $80,000 saves only $3,200. The same property produces a different after-tax cost depending on who owns it.
Understanding this distinction is the single most important insight in negative gearing:
A newer property with high depreciation ($8k-$12k per year) can be tax-negative but cash-positive — you get a tax refund AND a cash-positive rental. An older property in a high-interest-rate environment is usually cash-negative by a wide margin, with the tax refund offsetting only 30–40% of the cash loss.
Professional earning $150,000 (marginal rate 39% including Medicare), $800,000 investment property, $600/week rent, $640,000 loan at 6.2% interest-only.
| Item | Amount |
|---|---|
| Annual rent ($600 × 50) | +$30,000 |
| Cash expenses: | |
| Loan interest ($640k × 6.2%) | −$39,680 |
| Council rates | −$2,000 |
| Water | −$1,000 |
| Landlord insurance | −$1,200 |
| Property management (7.5%) | −$2,700 |
| Repairs | −$1,500 |
| Cash position | −$18,080 |
| Non-cash deductions: | |
| Capital works (Div 43, 2.5% × $250k) | −$6,250 |
| Plant & equipment (Div 40) | −$3,000 |
| Tax return rental loss | −$27,330 |
| Tax benefit at 39% | +$10,659 |
| After-tax cashflow | −$7,421 / year |
| Weekly after-tax cost | ~$143 / week |
The headline $18,080 cash loss becomes $7,421 after the tax refund — the investor holds the asset at ~$143/week. Over 10 years with 4–5% rent and capital growth, this typically breaks even on cashflow by year 6–7.
Division 43 (Capital Works): The building structure depreciates at 2.5% per year over 40 years (post-1987). A $250,000 building produces $6,250/year in non-cash deductions — $250,000 over 40 years.
Division 40 (Plant & Equipment): Carpets, blinds, ovens, hot water systems, air conditioning — each has its own effective life (5–15 years). Diminishing value or prime cost method.
2017 second-hand rule: Since May 2017, Division 40 generally cannot be claimed on previously used plant & equipment in residential property. New builds still qualify.
A quantity surveyor produces a depreciation schedule ($600–$1,000) documenting the depreciable components — the schedule is tax-deductible and typically pays for itself within the first year.
Estimate your Division 40 and 43 deductions →Annual tax benefits are only half the story. When you sell:
Division 43 reduces cost base: Every dollar of capital works deduction claimed reduces the CGT cost base. Bought for $500k, held 10 years with $60k Div 43 claimed, sold for $900k → taxable gain $460k (cost base reduced). Div 43 is essentially a deferral, not a permanent saving.
Division 40 doesn't reduce cost base: Plant and equipment depreciation is permanent — no CGT offset on sale.
With the 50% CGT discount on assets held over 12 months, the real driver of investor returns is capital growth — not annual tax refunds.
Estimate CGT on sale →What is negative gearing?
How much does negative gearing save me in tax?
Is negative gearing a good investment strategy?
What expenses can I claim on a rental property?
Can I claim loan principal repayments?
What is the difference between cash-negative and tax-negative?
Can I apply for PAYG variation to get the refund in my pay?
Is negative gearing being reformed?
What happens to negative gearing when I sell?
Tax Accuracy & Sources
This guide covers negative gearing rules current for 2025-26. Tax rates, Medicare thresholds, and Division 40 eligibility for second-hand residential plant are based on ATO-published positions. Complex ownership, trust, and company structures require professional advice.