Negative Gearing in Australia: What Property Investors Need to Know Before 30 June 2026
Key Takeaways
- Negative gearing occurs when investment costs exceed the income the investment produces.
- The resulting loss can be offset against your other assessable income, reducing overall tax.
- Negative gearing rules remain in place for 2025–26 under current legislation.
- Deductible costs include loan interest, management fees, rates, insurance, repairs and depreciation.
Here’s a number that should get every property investor’s attention: the ATO reports that around 90% of rental property tax returns contain errors.
That’s not a small margin. It means the vast majority of Australians claiming rental deductions are getting something wrong — and with the ATO’s data-matching programs now pulling information from banks, property managers, rental bond authorities, and landlord insurers, the chances of those errors going unnoticed are shrinking fast.
With 30 June 2026 approaching, now is the time to make sure your negative gearing claims are correct, complete, and defensible. And if you’re thinking about buying an investment property, there’s a major policy change on the horizon that could reshape your strategy entirely.
What Is Negative Gearing?
Negative gearing occurs when the deductible expenses on your investment property exceed the rental income it generates. The resulting net rental loss can be offset against your other income — such as your salary or business income — reducing your overall tax bill for the year.
Example: If your rental property earns $28,000 in rent but costs $38,000 to hold (interest, rates, insurance, management fees, depreciation), you have a $10,000 net rental loss. That loss reduces your taxable income by $10,000, saving you tax at your marginal rate.
If your other income isn’t enough to absorb the full loss in one year, the remainder carries forward to future years. The long-term strategy relies on the property’s capital growth eventually outweighing those annual cash flow shortfalls.
What Can You Claim? A Breakdown of Deductible Expenses
Not all property costs are created equal. The ATO divides rental expenses into three categories.
Immediately Deductible Expenses
These can be claimed in full in the year they’re incurred:
- Loan interest — on the investment portion of your mortgage only
- Council and water rates
- Land tax
- Property management fees and letting commissions
- Landlord, building, and contents insurance
- Advertising for tenants
- Repairs and maintenance (restoring something to its original condition)
- Pest control, gardening, and cleaning
- Body corporate fees
Expenses Claimed Over Several Years
- Borrowing costs (loan establishment fees, lender’s mortgage insurance): deductible over five years or the loan term, whichever is shorter. If total borrowing costs are $100 or less, claim them immediately.
- Capital works (Division 43): the cost of constructing or renovating the building’s structure, claimed at 2.5% per year over 40 years for residential properties built after 15 September 1987.
- Depreciation (Division 40): the decline in value of plant and equipment — carpets, blinds, appliances, hot water systems. Note: if you purchased a residential property after 9 May 2017, you cannot claim depreciation on second-hand assets.
What You Cannot Claim
- The principal portion of your loan repayments
- Stamp duty and conveyancing fees (these go into your cost base for CGT purposes)
- Travel expenses to inspect or maintain a residential rental property
- Expenses for periods of private use
- Costs of holding vacant land before it’s genuinely available for rent
The Repairs vs. Improvements Trap
This is one of the most common — and costly — mistakes rental property owners make.
Repairs restore an item to its original working condition. They’re immediately deductible. Improvements enhance the property beyond its original state or add something new. They’re not immediately deductible — they’re claimed as capital works over time.
Replacing a few broken fence palings? That’s a repair. Replacing the entire fence with a new Colorbond structure? That’s an improvement.
There’s also the “initial repairs” trap: if you fix defects that existed when you purchased the property, the ATO treats those as capital improvements — not repairs — even if the work looks like maintenance. This catches many new investors off guard.
Interest Deductions: The Redraw Problem
Loan interest is one of the largest deductions for most negatively geared investors — and one of the most scrutinised by the ATO.
The rule is straightforward: you can only claim interest on the portion of the loan used for the income-producing investment. Where investors get into trouble is with redraws. If you redraw funds from your investment loan to pay for a holiday, buy a car, or cover personal expenses, the interest on that redrawn amount is no longer deductible.
The ATO’s data-matching program cross-references loan details from financial institutions with what’s claimed on tax returns. If your interest deduction doesn’t match your loan balance, expect questions.
Negative Gearing and Capital Gains Tax: The Full Picture
Negative gearing is a short-term tax strategy. The long-term payoff comes when you sell — but that triggers Capital Gains Tax (CGT).
Your capital gain is calculated as the sale price minus your cost base. The cost base includes the purchase price, stamp duty, legal fees, and other acquisition costs. Importantly, any capital works deductions (Division 43) you’ve claimed over the years must be subtracted from the cost base — which increases your taxable gain.
The good news: if you’ve held the property for more than 12 months, you’re eligible for the 50% CGT discount. Only half of your net capital gain is added to your taxable income. For most investors, this discount is the cornerstone of the entire negative gearing strategy.
Major Changes Coming from 1 July 2027
This is the news every property investor needs to understand before making decisions in 2025–26.
The May 2026 Federal Budget announced sweeping reforms to negative gearing and CGT, effective 1 July 2027:
- Negative gearing restricted for established properties: Rental losses from established residential properties purchased after 12 May 2026 will no longer be deductible against salary or other personal income. Those losses can only offset other residential property income or be carried forward.
- New builds remain eligible: Negative gearing benefits are retained for newly constructed properties to encourage housing supply.
- Grandfathering applies: Properties purchased before 12 May 2026 are grandfathered — the existing rules continue to apply.
- 50% CGT discount replaced: From 1 July 2027, the 50% discount will be replaced by an inflation-adjusted (CPI) cost base model, with a minimum 30% tax rate on real capital gains.
- Transitional rules: Gains accrued before 1 July 2027 on assets held before that date will still be eligible for the 50% discount.
If you’re considering purchasing an investment property, the timing of that decision — before or after 12 May 2026 — has significant long-term tax implications. Speak to a tax professional before acting.
The ATO Is Watching: Data Matching in 2025–26
The ATO’s compliance focus on rental properties is more sophisticated than ever. For the 2025–26 financial year, the ATO is cross-referencing data from:
- Banks and lenders (Residential Investment Property Loan program) — to verify interest claimed
- Property management software companies — to check rental income and expenses
- State rental bond authorities — to identify undeclared rental properties
- Landlord insurance providers — to cross-reference property details
If your return doesn’t match the data the ATO already holds, you may receive a review letter — or worse, an audit.
Record-Keeping: What You Must Keep
The ATO requires you to keep records for at least five years from the date you lodge your tax return. For each property, you need:
- Rental income statements from your property manager
- Receipts and invoices for all expenses
- Loan statements showing interest charged
- A depreciation schedule from a qualified quantity surveyor (if claiming Division 40 or 43)
- Purchase and sale contracts, including conveyancing documents
- Records of any periods of private use
Good records aren’t just about compliance — they’re your best defence if the ATO comes knocking.
Sources
- ATO: How to claim rental expenses
- ATO: Rental expenses guide
- ATO: Depreciating assets in rental properties
- ATO: CGT discount
- ATO: CGT when selling your rental property
- ATO: Interest expenses
- Federal Budget 2026: Negative Gearing and CGT Factsheet
Get Expert Help With Your Rental Property Tax
Negative gearing can be a powerful strategy — but only if you get the details right. With the ATO’s data-matching programs running at full capacity and major legislative changes on the horizon, the cost of getting it wrong has never been higher.
TaxServe Australia specialises in helping property investors navigate the complexities of rental property tax, from maximising legitimate deductions to planning ahead for the 2027 reforms. Whether you own one investment property or a portfolio, our team is here to help you stay compliant and make the most of every dollar.
Contact TaxServe Australia today for a consultation and make sure your 2025–26 rental property tax is handled correctly.
Frequently Asked Questions
What is negative gearing in Australia?
Negative gearing occurs when the costs of owning an investment (such as loan interest and expenses on a rental property) exceed the income it produces. The resulting loss can be offset against your other assessable income, reducing your overall tax.
Is negative gearing still allowed in 2025-26?
Yes. Negative gearing rules remain in place for 2025-26. Investors can continue to deduct net rental losses against other income under current legislation.
What expenses can I claim on a negatively geared property?
Deductible expenses include loan interest, property management fees, council rates, insurance, repairs and maintenance, and depreciation on the building and eligible assets.