---
title: Negative Gearing Explained With 2026–27 Example | GNT Finance
description: Negative gearing explained with a worked Melbourne example at 2026–27 tax rates: how a rental loss cuts your tax, what it really costs per week, and the risks.
url: https://gntfinance.com.au/guides/negative-gearing-explained/
section: guides
updated: 2026-09-01
author: Gorakh Timilsina, GNT Finance
---

# Negative gearing explained

**In short:** Negative gearing means your investment property's deductible costs (interest, rates, agent fees, depreciation) exceed the rent, and you offset that loss against your salary to reduce income tax. On a $19,000 rental loss, a $120,000 earner saves about $6,100 in tax under 2026–27 rates. You still lose money each year; the strategy relies on capital growth outpacing the after-tax shortfall.

Negative gearing is the most talked-about and least understood part of Australian property investing. This guide works through an actual Melbourne example line by line, shows how the saving changes with your income, and is honest about what the strategy does and does not do for you.

## How negative gearing works

Australian tax law lets you deduct the costs of earning rental income from that rental income. If the costs are bigger than the rent, the result is a net rental loss. Unlike some countries, Australia lets you deduct that loss against your other income in the same year, including salary. A smaller taxable income means less tax, so part of your loss comes back as a refund.

The essential point: you only get a refund because you lost money. At a 32% marginal rate, every $1 of loss returns 32 cents. The other 68 cents is gone unless the property grows in value.

## Worked example: $650,000 Mernda house, $120,000 salary

Sanjay earns $120,000 a year. He buys a $650,000 house in Mernda with a $520,000 interest-only loan, rents it at $520 a week, and orders a depreciation schedule.

### Rental income and deductions

| Line | Annual figure |
|---|---|
| Rent ($520 × 52 weeks) | $27,040 |
| Interest (for illustration, at 6.00% p.a. on $520,000, interest-only) | $31,200 |
| Property management (7% of rent plus letting fee) | $1,893 |
| Council rates | $1,800 |
| Landlord and building insurance | $1,500 |
| Water service charges | $900 |
| Repairs and maintenance | $1,500 |
| Land tax (site value $350,000: $1,350 + 0.3% of $50,000) | $1,500 |
| Depreciation (capital works and plant, non-cash) | $6,000 |
| **Total deductions** | **$46,293** |
| **Net rental loss** | **−$19,253** |

### Effect on tax at 2026–27 rates

Sanjay's marginal rate is 30% plus the 2% Medicare levy, so each dollar of loss saves 32 cents.

| Item | Without property | With property |
|---|---|---|
| Taxable income | $120,000 | $100,747 |
| Income tax (15% on $18,201–$45,000; 30% on $45,001–$135,000) | $26,520 | $20,744 |
| Medicare levy (2%) | $2,400 | $2,015 |
| **Total tax** | **$28,920** | **$22,759** |
| **Tax saving** | | **$6,161** |

### What it actually costs him

| Cashflow | Annual |
|---|---|
| Cash outgoings (all deductions except depreciation) | −$40,293 |
| Rent received | +$27,040 |
| Pre-tax cash shortfall | −$13,253 |
| Tax saving | +$6,161 |
| **After-tax cash cost** | **−$7,092 (about $136 per week)** |

So Sanjay pays $136 a week to hold a $650,000 asset. If Mernda grows 4% in the year, the property gains $26,000 against a $7,092 cost. If it grows 1%, the $6,500 gain barely covers the cost. If it falls, he has lost on both counts. Run your own version in the [investment property cashflow calculator](/calculators/investment-property-cashflow/).

## Higher income, bigger refund

The tax saving scales with your marginal rate, which is why negative gearing is more attractive to higher earners.

| Taxable income band (2026–27) | Marginal rate incl. 2% Medicare | Saving on a $10,000 rental loss | Saving on Sanjay's $19,253 loss |
|---|---|---|---|
| $18,201 – $45,000 | 17% | $1,700 | $3,273 |
| $45,001 – $135,000 | 32% | $3,200 | $6,161 |
| $135,001 – $190,000 | 39% | $3,900 | $7,509 |
| $190,001 and over | 47% | $4,700 | $9,049 |

An investor on $220,000 with the same Mernda property would receive $9,049 back and carry an after-tax cost of about $4,200 a year ($81 a week). An investor on $40,000 would receive only $3,273 and carry about $10,000 a year. Same property, very different outcomes. The loss can also straddle two brackets, so the refund is not always a single percentage.

## Why the strategy relies on capital growth

Negative gearing is a holding strategy, not an income strategy. You accept a manageable annual loss in exchange for:

- **Capital growth** taxed only on sale, and only half of it if you hold more than 12 months (the 50% CGT discount). Read [capital gains tax on property](/legal/capital-gains-tax-on-property/) and estimate with the [CGT calculator](/calculators/capital-gains-tax/).
- **Rent growth** that gradually shrinks the loss. If Sanjay's rent rises 4% a year, the property is roughly neutrally geared within seven to eight years, sooner if he pays down principal.
- **Leverage.** He controls $650,000 of property with $130,000 of deposit, so 4% growth on the property is 20% on his cash.

Change any assumption (growth, rent, interest rate, vacancy) and the outcome moves quickly. That is the risk.

## Interest-only versus principal and interest

Interest is deductible whichever repayment type you choose. Principal repayments are not deductible, because they are you buying the asset rather than a cost of earning rent. Interest-only maximises the loss (and therefore the refund) and preserves cashflow; principal and interest reduces the loss over time and builds equity. Many investors run interest-only on the investment loan while directing spare cash into an offset against their non-deductible home loan. See [interest-only loans explained](/guides/interest-only-loans-explained/).

## What you can claim

The ATO's rental property guide at [ato.gov.au](https://www.ato.gov.au/) lists deductible items. In practice they fall into three groups:

| Immediately deductible | Deductible over time | Not deductible (added to cost base) |
|---|---|---|
| Loan interest, bank fees | Borrowing costs over 5 years (LMI, application fees) | Purchase price, stamp duty |
| Agent fees, advertising | Capital works at 2.5% p.a. (building, renovations) | Conveyancing on purchase |
| Council rates, water, land tax | Plant and equipment (new items only, since 2017 for established homes) | Travel to inspect the property |
| Insurance, repairs, pest control | | Initial repairs to fix pre-purchase damage |
| Accountant's fees for the rental schedule | | |

## Getting the refund during the year

A PAYG withholding variation lodged with the ATO tells your employer to withhold less tax each pay, so the $6,161 arrives as roughly $237 a fortnight rather than a lump sum after 30 June. Investors who are stretched on cashflow find this useful; the trade-off is a possible tax bill if the estimate is wrong.

## Risks to weigh

- **Interest rate rises.** At 8.00% p.a. Sanjay's interest is $41,600 and his after-tax cost more than doubles.
- **Vacancy.** Four weeks empty costs $2,080 in rent and the loss grows.
- **Policy change.** Negative gearing and the CGT discount have been political footballs for a decade. Any change would likely grandfather existing investors, but it cannot be assumed.
- **Concentration.** One property in one suburb is an undiversified bet.
- **Borrowing power.** Lenders count only 70–80% of rent and test all debt at your rate plus 3 percentage points, so a negatively geared property reduces what you can borrow next. Compare with [positive versus negative gearing](/guides/positive-vs-negative-gearing/).

## Negative gearing checklist

1. Confirm your marginal tax rate under the 2026–27 brackets.
2. Model cashflow at your rate plus 2% and with four weeks' vacancy.
3. Choose interest-only or principal and interest deliberately.
4. Keep the investment loan in its own split with no personal transactions.
5. Order a depreciation schedule straight after settlement.
6. Keep every receipt; the ATO audits rental schedules regularly.
7. Consider a PAYG withholding variation if cashflow is tight.
8. Put land tax in the budget from year one.
9. Review the loan annually; a lower rate reduces the loss without reducing growth.

## Common mistakes

- **Buying because of the tax break.** A property that only works with the deduction does not work.
- **Ignoring cashflow.** The refund arrives once a year; the mortgage is due every month.
- **Skipping the depreciation schedule** on a newer home, which can leave $5,000–$10,000 of deductions unclaimed each year.
- **Claiming initial repairs** as immediate deductions when they belong in the cost base.
- **Assuming the loss is fully deductible** when part of the property is used privately or rented below market to family.
- **Forgetting that a rental loss reduces your borrowing power** for the next purchase.

## Frequently asked questions

### How does negative gearing work in Australia?

If the deductible costs of an investment property (interest, rates, insurance, agent fees, depreciation) exceed the rent, you have a net rental loss. You subtract that loss from your other taxable income, including salary, so you pay less tax. At a 32% marginal rate, a $10,000 loss cuts your tax by $3,200. The other $6,800 is a real cost you hope capital growth will exceed.

### How much tax do you get back from negative gearing?

Your rental loss multiplied by your marginal tax rate including the Medicare levy. Under 2026–27 rates that is 17% for incomes between $18,201 and $45,000, 32% up to $135,000, 39% up to $190,000 and 47% above that. A $19,000 loss returns about $6,100 to a $120,000 earner and about $8,900 to a $220,000 earner. Losses that straddle a bracket boundary are taxed partly at each rate.

### Is negative gearing still worth it in 2026?

It can be, if the property has real growth prospects and you can carry the after-tax shortfall comfortably even after a 2% rate rise. It is not worth it for a property chosen purely because it is cheap, or if the annual cost strains your household budget. Treat the refund as a discount on the holding cost, not as the reason to buy.

### Can you negatively gear with a principal and interest loan?

Yes. Only the interest portion of each repayment is deductible, so the loss is smaller than with interest-only, and it shrinks each year as the balance falls. Many investors prefer this: a lower rate, forced equity building and a property that becomes positively geared sooner. Interest-only suits investors who still have non-deductible home loan debt to clear first.

### What can I claim on an investment property?

Loan interest, property management fees, advertising, council rates, water charges, land tax, insurance, repairs, pest control, body corporate fees, depreciation on the building and eligible fixtures, and accountant's fees for the rental schedule. Borrowing costs such as LMI are claimed over five years. Stamp duty, conveyancing and improvements are not deductible but form part of the cost base for capital gains tax.

### Does negative gearing apply to land tax?

Land tax on an investment property is a deductible expense, so it forms part of the rental loss you offset against other income. In Victoria a property with a site value of $350,000 attracts about $1,500 a year at 2024–2033 rates. Your own home is exempt from land tax, so there is nothing to claim there. Estimate your bill with the [Victorian land tax calculator](/calculators/land-tax-victoria/).

## Talk to GNT Finance

GNT Finance arranges investment loans across Melbourne, from a first rental in [Mernda](/mortgage-broker/mernda/) to a growing portfolio, and structures each loan so your interest is clearly deductible and your borrowing power is protected for the next purchase. Explore our [investment property loans](/services/investment-property-loans/) or [Book a free consultation](/contact/). Call 0426 403 703.

*This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.*