Please fill out the details below to receive information on Blue Wealth Events
"*" indicates required fields
Back to Basics: What Is Negative Gearing?
Negative gearing gets debated constantly, but rarely explained. We break down the mechanism, the coming rule changes, and what they mean for investors.
I was talking recently to someone who owns around 20 physiotherapy practices and realised partway through the conversation that he didn’t actually know what negative gearing was.
He’s obviously commercially successful, so it made me wonder how many people hear the term constantly without ever having had the mechanism explained properly. In property we tend to assume everyone knows what it means, because it’s been part of the Australian investment landscape for decades. We debate whether it should exist, whether it pushes up prices, what investors might do in response, often without first establishing exactly what it does.
That matters more now because the rules are changing, and it’s hard to assess the consequences of changing a system if we don’t understand how the original one worked.
What Negative Gearing Actually Is
Gearing simply means using borrowed money to acquire an investment. If the income it produces is greater than its deductible expenses, it’s positively geared. If expenses exceed income, the investment produces a tax loss and is negatively geared.
Take a simple example. A residential investment property produces $35,000 of rent during the year and has $45,000 of deductible expenses across interest, property management, rates, insurance and eligible maintenance. The property has generated a $10,000 tax loss. Under the traditional rules, that loss can generally be deducted against the investor’s other assessable income; someone earning $150,000 from employment might have their taxable income reduced to $140,000 before other deductions.
In this example, the investor has still incurred a $10,000 loss.
That’s probably the most important thing to understand here, because negative gearing is sometimes described as though the tax system somehow turns a loss into a profit. It doesn’t. If you spend a dollar to save a fraction of it in tax, you’re still behind. What negative gearing actually does is reduce the after-tax cost of carrying the investment while the investor waits for rent, and hopefully the value of the asset, to grow.
The ATO describes a negatively geared rental property as one where rental income is less than the deductible expenses associated with it, with the resulting loss potentially deductible against income such as salary, wages or business income. That’s the basic mechanism.
Why Negative Gearing Became So Important to Residential Property
Negative gearing isn’t really a special property concept. The broader principle can apply wherever deductible costs on an income-producing investment exceed the income it generates. Residential property is where it became particularly important because of the way property is normally financed. An investor might contribute a relatively modest amount of equity and borrow several hundred thousand dollars to control a much larger asset, which magnifies the importance of the interest cost, especially early in the ownership period.
Rent isn’t necessarily static either. It can rise with the market, and owners can sometimes improve a property’s income-generating capacity through better management, presentation or renovation, so the investor has some ability to influence the income side of the equation over time.
Unlike borrowing to hold an asset that produces nothing while you wait for it to appreciate, residential property normally has a tenant contributing to the holding cost from day one. Negative gearing then softens whatever shortfall remains. In the earlier example, the tenant is already covering most of the annual holding cost. The investor carries the remaining $10,000 economic loss, and the tax deduction reduces the after-tax amount they have to fund themselves.
Over time that equation can shift. Rent may rise, debt may fall, and the property can move from negatively geared towards neutral or positive cash flow, while the investor keeps their exposure to changes in the value of the entire asset. It still doesn’t make a bad property a good investment. It changes the cost of holding one.
Negative Gearing and Cash Flow Aren’t Quite the Same Thing
People often use negative gearing and negative cash flow as though they’re the same thing. They’re not necessarily.
Principal repayments are a real cash cost but generally aren’t deductible, because the investor is paying down the loan rather than incurring an expense. At the same time, deductions like depreciation or capital works can affect the taxable result without the investor writing a cheque for the same amount that year. The tax result and the amount actually moving through the investor’s bank account can be different things. Negative gearing describes the tax position created by the income and deductible expenses of the investment, not simply whether the property costs the investor money each month, which becomes relevant once you look at what’s actually changed.
So What Is Changing?
From 1 July 2027, the treatment of residential property splits depending on what kind of property an investor owns and when it was acquired. Properties bought before 7:30pm AEST on 12 May 2026 are grandfathered and keep the existing arrangements. Eligible new builds can also continue to be negatively geared after 1 July 2027; the reform is specifically designed to retain the tax treatment for new housing while restricting it for established residential property bought after the cut-off. Commercial property isn’t affected, and the broader principle of deducting costs against income-producing investments hasn’t been abolished. This is targeted specifically at established residential housing.
The treatment of an established residential property bought after the cut-off is different. From the 2027-28 income year, losses from those properties can no longer be deducted against unrelated income such as salary. Instead they’re quarantined within residential property, deductible against other residential property income, including residential capital gains, with excess losses carried forward into later years (Treasury). That’s a meaningfully different outcome from the loss simply disappearing until the property sells. It doesn’t disappear; the range of income it can be used against has just been narrowed substantially.
Return to the $10,000 example. An eligible new property producing that loss can still potentially use it against salary or other income under the ordinary rules. An affected established property producing exactly the same loss can’t. Same rent, same interest bill, same economic loss, but a different after-tax carrying cost, and one that compounds in importance as the debt and the annual loss grow larger.
Why the New/Established Distinction Matters
The policy is deliberately trying to redirect where investment capital goes. Rather than removing negative gearing altogether, the government has kept it for new housing while restricting it for established residential property. Treasury describes the objective as redirecting tax support towards new housing supply.
That creates an unusual situation where two very similar properties can end up with different economics. A newly completed apartment and an established one in the same suburb might have similar prices, rents and interest costs, sit a few streets apart, and both produce a $10,000 annual tax loss, yet the investor’s ability to use that loss depends entirely on which one they bought. Investors don’t decide on price alone; they weigh the return against the capital required, the income produced, the cost of debt and the after-tax amount they carry while they own it. Change one part of that equation and behaviour can change with it.
The more useful question, then, isn’t simply whether negative gearing has been “removed.” It hasn’t. It’s where it still exists, where it’s been restricted, and how that changes the relative economics between different types of investment.
Why We Sometimes Need to Go Back to Basics
Most of the discussion around this reform has already moved several steps past the mechanism itself, straight to whether investors will buy fewer established properties, whether capital shifts towards new housing, and what that eventually does to prices and rental supply. Those are the questions I spend most of my time thinking about, and I’ll get into them properly in a follow-up piece.
But every one of those questions starts further back in the causal chain. Negative gearing reduces the after-tax cost of carrying a leveraged investment. Residential property has historically made unusually heavy use of that mechanism because investors commonly borrow substantial amounts while rental income offsets part of the holding cost. The new rules preserve that treatment for eligible new housing while restricting how losses on affected established property can be used.
Once we understand the mechanism, we can start thinking properly about how investors respond to it. Without that foundation, “negative gearing reform” is just a phrase that tells us something changed, not what, or what it means.
Ready to make sense of where the market stands right now? Book a discovery call with Blue Wealth Property today.
See more like this
There are no results to display.
Please try a different keyword or reset the filters to see everything.
