When to Use Negative Gearing on Investment Property

Negative gearing means the rental income from your investment property falls short of the holding costs, and you claim that loss against your salary to reduce your tax bill.

The calculation changed on 1 July 2027. Properties purchased before 7:30pm on 12 May 2026 still operate under the old rules where you can offset rental losses against your salary. Properties purchased after that date quarantine those losses. You can only use them against future rental income or capital gains from residential property. Your salary stays untouched.

How Negative Gearing Works Under the Old Rules

Under the old rules, you add up all the deductible costs on your rental property for the financial year: loan interest, council rates, insurance, property management fees, repairs, body corporate fees if applicable, and depreciation on the building and fixtures. You subtract the rent you collected. If the costs exceed the rent, that net loss reduces your taxable income.

Consider a RAAF member at Richmond who purchased an established unit in Penrith in early 2026 and settled before the May cut-off. Annual rental income sits at around $28,000. Deductible expenses including interest come to $35,000. That $7,000 loss reduces the member's taxable income by the same amount. At a marginal tax rate of 32.5 per cent, the tax saving is roughly $2,275 for the year. The member still wears the $7,000 shortfall out of pocket, but the tax office returns some of it.

This approach only makes sense if you expect the property to deliver a capital gain over time that outweighs the cumulative cash shortfall. Negative gearing is not a wealth-building tool on its own. It reduces the annual cost of holding an asset you expect to appreciate.

Quarantined Losses from 1 July 2027

From 1 July 2027, rental losses on residential properties purchased after 7:30pm on 12 May 2026 can only be offset against other residential rental income or carried forward to offset future rental income or future capital gains when you sell. They do not touch your salary or other income sources.

A scenario like this illustrates the shift. A corporal posted to Richmond purchases an established apartment in Blacktown in late 2026 and settles in early 2027. The property generates a rental loss of $6,000 in the first full financial year. Under the quarantined rules, that loss sits in a pool. It cannot reduce the member's taxable salary income. If the member buys a second investment property that makes a rental profit, the quarantined loss can offset that profit. Alternatively, the member carries the loss forward until the Blacktown apartment is sold, and the loss reduces the capital gain at that point.

The cash impact remains identical. The member still funds the $6,000 shortfall from their own pocket each year. The difference is timing. Under the old rules, the tax benefit arrives in the same financial year. Under the quarantined rules, it arrives later when you have offsetting rental income or when you sell.

Eligible New Builds and the Exemption

Eligible new builds purchased after 7:30pm on 12 May 2026 retain access to the old negative gearing rules. The property must be newly constructed on previously vacant land, or the construction must increase the number of dwellings on the site. A knock-down rebuild that replaces one dwelling with one dwelling does not qualify. A substantial renovation of an existing property does not qualify.

Once a new build has been occupied for more than 12 months before it is sold to a subsequent investor, that subsequent investor loses access to the exemption. The exemption applies only to the first investor who purchases the property as new or near-new.

RAAF personnel at Richmond looking to access the exemption will generally be considering properties in growth corridors west and northwest of the base where new construction is concentrated. Marsden Park, Box Hill, and Vineyard are examples of areas with significant new dwelling supply. These locations sit 15 to 25 kilometres from the base and are serviced by the expanding Northwest Metro line.

Capital Gains Tax from 1 July 2027

For properties owned before 1 July 2027 and sold after that date, the capital gain is split into a pre-1 July 2027 portion and a post-1 July 2027 portion. The pre-2027 gain is taxed under the existing 50 per cent discount method if you held the property for at least 12 months. The post-2027 gain is indexed to inflation and taxed at a minimum rate of 30 per cent on the real gain.

Investors purchasing eligible new builds after 7:30pm on 12 May 2026 may elect either the 50 per cent discount or the indexation method with the 30 per cent minimum rate when they sell. The election is made at the time of sale, allowing the investor to choose whichever method delivers the lower tax outcome based on actual inflation and holding period.

For a property purchased in 2026 and held for ten or fifteen years, the difference between the two methods depends on inflation over that period. If inflation averages 3 per cent annually, indexation will usually produce a lower tax bill than the 50 per cent discount. If inflation remains low, the discount method may be preferable. You can model both at the time of sale and choose accordingly.

Interest Only Repayments and Deductibility

Many investors structure investment property loans on an interest-only basis to maximise the deductible interest component and minimise the annual cash outlay. Principal repayments are not deductible. Interest is deductible to the extent the loan was used to purchase or hold an income-producing asset.

An interest-only period runs for a fixed term, commonly five years, after which the loan converts to principal and interest unless you refinance or negotiate an extension. During the interest-only period, your repayments are lower, but your loan balance does not reduce. Once the loan reverts to principal and interest, the repayment jumps because you are now paying down the loan over the remaining term.

Interest-only loans generally attract a higher interest rate than principal and interest loans, and lenders apply higher serviceability buffers. Under APRA's current prudential standards, lenders assess your ability to service the loan at the actual rate plus a buffer of at least 3 percentage points. For interest-only investment loans, the assessed rate is applied to the principal and interest repayment that will apply after the interest-only period ends, not the lower interest-only repayment during the initial period.

Serviceability and the Debt-to-Income Cap

From 1 February 2026, each lender can approve no more than 20 per cent of new investor loans at a debt-to-income ratio of 6 times or greater. If your total debt across all loans is six times your gross annual income or higher, you may find fewer lenders willing to approve your application, particularly if the lender has already allocated a significant portion of its capacity to high DTI lending earlier in the year.

For a RAAF member at Richmond on a gross income of $95,000, a DTI of 6 times equates to total borrowings of $570,000. If you already have an owner-occupied loan of $450,000, your capacity to borrow for an investment property without exceeding the DTI threshold is limited. Lenders assess DTI based on total debt, not individual loan size.

The DTI cap does not prohibit lending above 6 times income. It limits the proportion of each lender's portfolio that can sit in that band. Some lenders will still approve loans above the threshold if the application is strong and the lender has capacity remaining. Others will decline or require a larger deposit to bring the DTI down.

Rental Income and Serviceability Assessment

Lenders include rental income in their serviceability assessment, but they apply a shading factor to account for vacancy, arrears, and management costs. Most lenders assess rental income at 75 to 80 per cent of the market rent. If the property rents for $550 per week, the lender will typically assess serviceability using $412 to $440 per week.

Some lenders require a signed lease or a rental appraisal from a licensed property manager before they will include rental income in the assessment. If you are purchasing an established property that is currently tenanted, the existing lease provides evidence of rental income. If you are purchasing a vacant property or a new build not yet completed, you will need a rental appraisal.

Rental income is treated as assessable income for serviceability purposes, but it does not increase your borrowing capacity dollar-for-dollar. The net effect after applying the shading factor and adding the new loan repayments usually results in a modest increase in total borrowing capacity compared to applying for an owner-occupied loan of the same size.

When Negative Gearing Makes Sense

Negative gearing makes sense when the capital growth and rental income over the full holding period exceed the cumulative out-of-pocket cost and the tax on the eventual gain. It does not make sense if the property stagnates or if the annual shortfall becomes unaffordable.

For ADF members posted to Richmond, a property within a reasonable commute of the base offers the option to convert it to an owner-occupied property in future if posting patterns allow. That optionality has value. A property in a distant state purchased purely for yield may deliver stronger cash flow in the early years, but it offers no flexibility if your circumstances change.

Negative gearing also makes sense when your marginal tax rate is high enough that the tax benefit is material. At a marginal rate of 32.5 per cent, a $7,000 rental loss delivers a $2,275 tax saving under the old rules. At a marginal rate of 19 per cent, the same loss delivers $1,330. The after-tax cost of holding the property is $4,725 versus $5,670. The difference compounds over ten or fifteen years.

Under the quarantined rules, your marginal tax rate at the time you incur the loss is less relevant. The benefit depends on your marginal rate at the time you offset the loss against future rental income or capital gains, which may be higher or lower depending on your career progression and income at that point.

Claimable Expenses Beyond Interest

Interest is usually the largest deductible expense, but it is not the only one. Council rates, water rates, strata levies, landlord insurance, property management fees, repairs and maintenance, pest control, gardening for common areas, and depreciation on the building and fixtures are all deductible to the extent the property is rented or genuinely available for rent.

Repairs are immediately deductible. Improvements that increase the value or function of the property must be depreciated over time. Replacing a broken hot water system is a repair. Installing a new hot water system where none existed is an improvement. Repainting a room in the same colour is a repair. Repainting the entire property as part of a renovation is usually treated as an improvement.

Depreciation on the building and fixtures can be claimed using a quantity surveyor's report. For properties purchased after 7:30pm on 9 May 2017, you can only claim plant and equipment depreciation on assets you purchased new. You cannot claim depreciation on second-hand assets such as dishwashers, ceiling fans, or blinds that were installed by a previous owner. Building depreciation is not affected by this rule and can still be claimed on older properties, subject to the applicable depreciation rate and remaining effective life.

Refinancing to Access Equity

Once your investment property increases in value, you can refinance to access the equity without selling. The equity is the difference between the current property value and the outstanding loan balance. Lenders will typically allow you to borrow up to 80 per cent of the property value without incurring lenders mortgage insurance, or up to 90 or 95 per cent with LMI if you meet eligibility criteria.

If you use the released equity to purchase another investment property, the interest on the additional borrowing is deductible. If you use the released equity for private purposes such as a holiday or car purchase, the interest on that portion is not deductible, even though the loan is secured against the investment property. The deductibility follows the use of the funds, not the security.

Equity release allows you to build a portfolio without saving a new deposit for each property. The risk is that you are increasing your total debt and relying on continued capital growth across multiple properties to support the strategy. If values fall or rental income drops, you may find yourself overextended.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions