Do you know how negative gearing really works?

Negative gearing reduces your taxable income when your rental expenses exceed your rental income

Negative gearing lets you deduct the loss from an investment property against your salary or other income. If your annual interest, property management fees, council rates, insurance and maintenance add up to more than the rent you collect, that loss reduces your tax bill.

Consider an investor who purchases an established property in Mount Eliza. The rental income brings in $28,000 annually, but interest on the loan costs $32,000, with another $6,000 in rates, insurance and management fees. The total loss is $10,000. That $10,000 can be deducted from the investor's wage income, reducing the taxable income from $95,000 to $85,000. At a marginal rate of 32.5 per cent, the immediate tax saving is $3,250. The investor is still out of pocket by $6,750 each year, but the capital growth over time is intended to offset that shortfall and deliver a net return when the property is eventually sold.

Properties held before 12 May 2026 are grandfathered under the old rules

If you owned an investment property on 12 May 2026, or had a signed contract on or before that date, you can continue to deduct losses from that property against all your income for as long as you hold it. The grandfathering applies to established dwellings and means the treatment you relied on when you bought has not changed.

Properties purchased after that date are subject to new restrictions unless they meet the definition of an eligible new build. From the 2027-28 income year, losses on affected properties can only be offset against income from other residential investment properties, including capital gains on residential property. You can still claim every deductible expense, but the loss no longer reduces your wage or business income. Excess losses carry forward and can be used in future years against residential property income.

New builds remain fully deductible regardless of purchase date

An eligible new build is a dwelling constructed on previously vacant land, or a replacement dwelling where the total number of dwellings on the site increases. If you purchase a newly built property that meets this definition, you can continue to deduct losses against your full income even if the purchase occurs after 12 May 2026. Knock-down rebuilds that do not increase the number of dwellings do not qualify, and substantial renovations also fall outside the exemption.

The new build must not have been occupied for more than 12 months before you purchase it. If the developer or first owner occupies or rents the property for more than a year and then sells it to you, it loses the new build status and you are subject to the restricted deduction rules.

The way capital gains are taxed also changes from 1 July 2027

Under the old rule, you received a 50 per cent discount on capital gains for assets held longer than 12 months. From 1 July 2027, gains on affected residential property are indexed to inflation and taxed at a minimum rate of 30 per cent on the real gain. For a property purchased before 1 July 2027 and sold after that date, gains are split. The portion that accrued up to 1 July 2027 is taxed under the 50 per cent discount, and the portion accruing after that date is taxed under the indexed model with the 30 per cent minimum.

Investors in eligible new builds can choose between the old 50 per cent discount and the new indexed method when they sell, giving flexibility to pick whichever delivers the lower tax outcome based on their circumstances at the time.

Interest remains deductible even when losses are quarantined

Even though losses on properties purchased after 12 May 2026 may be quarantined, every dollar of interest you pay on the loan for that property remains a claimable expense. The same applies to all other holding costs such as body corporate fees, property management fees, repairs and depreciation. The difference is not what you can claim, but where you can use the loss.

In practice, this means the negative cash flow still occurs, but the immediate tax offset is delayed unless you have other residential property income to absorb it. Losses accumulate and carry forward, so when you eventually sell the property or acquire further rental income, those deductions come into play.

Borrowing capacity is assessed on net rental income after expenses

Lenders assess borrowing capacity by applying a serviceability buffer and factoring in your existing debts, living expenses and income. For an investment loan, rental income is included, but lenders typically shade it by 20 to 30 per cent to account for vacancy, maintenance and management costs. If your property is negatively geared, the net loss flows through the assessment and reduces your borrowing power.

An investor earning $110,000 annually with $35,000 in rental income and $45,000 in property expenses has a net rental loss of $10,000. That loss is subtracted from their gross income when the lender calculates serviceability, reducing the amount they can borrow for a second property or any other loan. The tax benefit of negative gearing improves your after-tax position but does not increase your borrowing capacity in the eyes of the lender.

Mount Eliza investors often hold properties for long-term capital growth

Mount Eliza sits on the Mornington Peninsula and attracts investors looking for a mix of lifestyle appeal and proximity to Melbourne. Properties in the suburb tend to hold value through economic cycles, and the demographic skews towards families and retirees, which supports stable occupancy. Rental yields in the area are generally modest, so most investors rely on capital appreciation rather than positive cash flow.

A negatively geared property in Mount Eliza might cost $850,000, with a rental return of $550 per week generating $28,600 annually before expenses. Interest on an 80 per cent LVR loan at current variable rates would exceed that figure, particularly in the first few years. The investor accepts the shortfall because the long-term expectation is for the property value to increase in line with broader peninsula growth, and the immediate tax deduction offsets part of the holding cost.

Refinancing can change your cash flow without changing your tax position

If you refinance your investment loan to a lower rate or switch from principal and interest to interest-only repayments, your cash flow improves but the tax treatment stays the same. A lower interest rate reduces your annual expense, which reduces your loss and therefore reduces your tax deduction. An interest-only period keeps your repayments lower for a set term, but the interest component remains fully deductible as long as the borrowed funds were used to purchase or hold the investment property.

Some investors refinance to access equity for a deposit on a second property. The interest on the portion of the loan used to acquire the new investment remains deductible, but if any portion is used for private purposes, that portion of the interest is not deductible. Lenders and brokers structure loans to keep investment and private purposes separated, usually by splitting the facility into distinct loan accounts with clear purposes documented at the time of drawdown.

You need to keep records that connect every expense to the property

The ATO requires you to substantiate every deduction you claim. For investment property expenses, that means keeping loan statements, rates notices, insurance invoices, body corporate statements, property management agreements and receipts for repairs. If you claim depreciation, you need a quantity surveyor's report. If you claim travel to inspect or maintain the property, you need a logbook and evidence the trip was for income-producing purposes, not personal.

Where an expense has both a private and investment component, only the investment portion is deductible. If you use a home office to manage your rental property, you can claim a proportion of electricity, internet and depreciation on office furniture based on the floor area and hours of use. The record-keeping requirement applies to properties under both the old and new negative gearing rules, and compliance has been a focus area for the ATO since the 2026 legislation came into force.

Call one of our team or book an appointment at a time that works for you. We work with property investors across Mount Eliza, the Mornington Peninsula and Australia-wide, and we can walk through your lending options, tax position and portfolio strategy before you commit to a purchase.

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