Negative gearing means your rental expenses exceed rental income and the loss is claimed against your other taxable income. In 2026 the rules that let landlords offset rental losses remain the same: interest and many running costs are deductible, capital gains on later sale still get a 50% discount if held more than 12 months, and the tax benefit equals the investor's marginal tax rate (plus the 2% Medicare levy). This guide breaks down the costs of negative gearing and the tax savings you might get, using examples, fees, common pitfalls, and regional differences.

Quick-reference: key figures (2026)

Keep this list as a cheat sheet.

  • Capital gains tax discount for individuals who hold >12 months: 50%.
  • Personal income tax brackets (resident rates): 0% up to $18,200; 19% $18,201–$45,000; 32.5% $45,001–$120,000; 37% $120,001–$180,000; 45% $180,001+.
  • Medicare levy: 2% (applies in addition to marginal rates).
  • Typical investor variable mortgage rates (2026 example range): 5.5%–6.5% p.a.
  • Example purchase price used in case study: $700,000.
  • Example loan (80% LVR): $560,000.
  • Interest cost at 6% on $560,000: $33,600 per year.
  • Gross rental yield examples: 3.0% (low), 4.5% (medium), 5.5%+ (regional/high-yield).
  • Other annual running costs used in examples: $5,000 (agent fees, rates, insurance, maintenance).
  • Net rental loss (example A): $17,600 per year on a $700,000 property with 3% yield and 6% interest.

Detailed breakdown: how negative gearing works and what it costs

Negative gearing occurs when your deductible expenses on an investment property, like interest and fees, are more than the rent you collect. That net rental loss reduces taxable income for the year. You save tax by multiplying your marginal tax rate plus the 2% Medicare levy by the loss amount.

What you can usually deduct:

  • Interest on the investment loan — the biggest item for most investors.
  • Property management fees and advertising for tenants.
  • Council rates, water rates and strata fees.
  • Insurance (building and landlord policies).
  • Repairs and maintenance (not capital improvements).
  • Capital works deduction (building depreciation) — commonly 2.5% p.a. On qualifying construction expenditure.
  • Depreciation on eligible plant and equipment — rules are limited for second-hand items bought before you owned them.

What you can't deduct as an immediate expense:

  • The purchase price (capital cost) — this affects capital gains tax when you sell.
  • Capital improvements (these are added to the cost base and depreciated or claimable on sale).

Example calculations (real numbers)

Look, example A — low-yield city unit

  • Purchase price: $700,000.
  • Loan (80% LVR): $560,000. Interest rate: 6% → interest = $33,600.
  • Gross rent (3.0% yield): $21,000 per year.
  • Other costs (agent, rates, insurance, maintenance): $5,000.
  • Total deductible expenses: $38,600. Net rental loss = $38,600 − $21,000 = $17,600.

Tax saving on that loss varies by marginal rate (including 2% Medicare):

Mastheads
  • If marginal rate = 32.5% (+2%) = 34.5% → tax saving ≈ $6,072 per year.
  • If marginal rate = 37% (+2%) = 39% → tax saving ≈ $6,864 per year.
  • If marginal rate = 45% (+2%) = 47% → tax saving ≈ $8,272 per year.

Example B — higher-yield regional house

  • Purchase price: $500,000. Loan (80%): $400,000. Interest at 6% = $24,000.
  • Gross rent (5.0% yield): $25,000.
  • Other costs: $5,000. Total expenses = $29,000. Net loss = $4,000.
  • Tax saving at 39% ≈ $1,560 per year — much smaller loss, partly cashflow-positive depending on expenses.

These numbers show how changes in interest rates can really affect your investment. If the 6% interest drops to 5% on the $560,000 loan, interest falls to $28,000 and the negative position narrows by $5,600.

Upfront and ongoing costs to budget for (specific prices)

  • Stamp duty: varies by state and price — typical bill on a $700,000 purchase can be tens of thousands. Expect roughly $15,000–$35,000 depending on state and concessions.
  • Conveyancing/settlement fees: $800–$2,000.
  • Loan establishment or application fees: $0–$1,000 (some lenders waive these).
  • Lenders Mortgage Insurance (LMI): applies if deposit <20% — can be thousands to tens of thousands depending on LVR and loan size.
  • Ongoing property management fee: commonly 6%–8% of weekly rent; on $21,000 rent that's $1,260–$1,680 per year.
  • Council rates and water: typically $1,200–$3,000 annually, depending on location and property type.
  • Insurance: $800–$2,000 per year.

Eligibility and step-by-step claim process

To claim negative gearing you must:

  1. Hold the property as an investment (not your primary residence).
  2. Record all rental income and issue/retain receipts for expenses.
  3. Include rental income in your annual tax return and claim allowable deductions in the rental schedule.
  4. Keep clear records for at least five years for many expenses, and longer for capital items affecting capital gains.

Practical steps each year:

  • Get an annual rental statement from your property manager.
  • Collect invoices and receipts for repairs, maintenance and insurance.
  • Commission a depreciation schedule if the building or new assets warrant it — one-off cost typically $400–$900 but it can lift deductions materially.
  • Enter figures in the rental property section of your tax return or provide them to your accountant.

Common mistakes to avoid

  • Claiming capital expenditure (like a new extension) as an immediate repair — that’s a capital cost, not a current-year deduction.
  • Failing to apportion expenses correctly when using the property privately at times (short stays, family use).
  • Not claiming depreciation where available — missing a depreciation schedule can leave thousands of dollars on the table over several years.
  • Mixing personal and loan accounts — makes interest apportionment messy and raises audit risk.
  • Assuming negative gearing guarantees a better return — it reduces tax in the short term but depends on capital growth and overall cashflow.

Regional differences and typical yields (2026 ranges)

Property prices and rent yields vary a lot across Australia. Typical gross yields in 2026:

  • Sydney metro: 2.5%–3.5%.
  • Melbourne metro: 2.8%–3.6%.
  • Brisbane: 3.4%–4.2%.
  • Adelaide: 3.8%–4.5%.
  • Perth: 4.0%–5.0%.
  • Regional towns: often 5.0%–7.0% or higher for affordable stock.

Lower yields in Sydney and Melbourne mean the same loan size creates a larger negative gearing loss than a similar loan in a regional area with higher rent.

Alternatives and comparisons

If negative gearing leads to large ongoing cashflow losses, consider:

  • Buying lower-priced properties with higher yields (regional or outer suburbs).
  • Reducing interest costs — fixed-rate deals or switching lenders if cheaper rates are available.
  • Investing in ETFs, LICs or dividend stocks — no property management headaches and different tax timing.
  • Using tax-effective structures or salary packaging — but get personalised tax advice; structures change tax treatment and borrowing costs.

2026 outlook

Interest-rate direction will be the main driver of how much negative gearing costs in 2026. A 1 percentage point fall on a $560,000 loan reduces annual interest by $5,600. Policy debate continues about the tilt of property tax settings — changes to capital gains tax discounts or negative gearing rules could alter the arithmetic for investors. For now, the mechanics remain: deduct allowable losses now, and capital gains are eligible for a 50% discount if you hold more than 12 months.

Related Articles

Negative gearing in 2026 can reduce your taxable income but often costs more in cash than it saves in tax. With interest costs commonly the largest item — examples show a $560,000 loan at 6% produces $33,600 in interest — the net loss and the tax offset depend on rent yield and your marginal tax rate. Work the numbers: list expected rent, realistic vacancy and maintenance, add stamp duty and setup costs, then calculate the after-tax cashflow. That makes clear whether negative gearing is a manageable strategy or a costly bet on future capital gains.

This article was created with AI assistance.