Negative gearing explained — the Australian tax mechanic, stripped of the politics.

The mechanic in one paragraph.

You own an income-producing investment property. Your deductible expenses (interest, rates, insurance, depreciation, repairs) exceed your rental income for the year. The shortfall — the loss — is deducted from your other taxable income (salary, dividends, business). You pay less tax overall. The amount you pay less = the loss × your marginal tax rate, capped at the tax you actually owed.

That’s it. Same mechanic you’d get holding any loss-making income-producing asset: a margin-loaned share portfolio, a rental machine in your business, a tree farm. The legal authority is ITAA 1997 s8-1: “you can deduct from your assessable income any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income.”

What counts as a deduction?

Twelve categories, each cited to the Act:

• Interest on loan — s8-1 (via TR 95/25 nexus test). The biggest line for most investors.
• Council rates, water rates, insurance, strata admin, property management, advertising, land tax — s8-1. Cash outlays directly tied to the income production.
• Repairs & maintenance — s25-10. Restoration to original state only. Improvements are capital — they flow through depreciation (Div 40/43) or CGT cost base, not this year’s deductions.
• Div 40 plant & equipment depreciation — s40-25 / s40-75. Diminishing-value method at 200% ÷ effective life per year. Covers carpet, A/C, blinds, ovens, dishwashers, hot water systems.
• Div 43 capital works— s43-10. Straight-line 2.5% of eligible construction basis per year for 40 years. Only post-15-September-1987 construction qualifies. A quantity surveyor’s report is the usual substantiation.
• Borrowing cost amortisation — s25-25. Loan establishment fees + mortgage registration, straight-line over 5 years.

What does notqualify: the purchase price (flows through cost base at sale), stamp duty (capital, flows through cost base), structural additions (Div 43 going forward), loan principal repayments (they’re not an expense, they pay down debt). Mixing these up is how buyers get their refund math wrong.

The refund math.

Single-owner, 37% marginal rate, typical numbers:

That $10,188 is your tax back. The property cost you $6,835 of actual cash this year (interest + cash outlays − rent) — depreciation lines and borrowing amortisation aren’t cash. After refund, net out-of-pocket is $(6,835) − $10,188 = +$3,353 cash-positive. That’s how a loss on paper becomes cash in pocket, because depreciation is a book entry not a cash one.

Carry-forward losses: when refund > tax paid.

If your property loss × marginal rate exceeds the tax you actually paid on other income, the excess doesn’t disappear. It carries forward indefinitely as a quarantined loss (s36-17), available to offset future gains — rental profit, share income, business profit, salary. There’s no election and no expiry.

This matters most for owners with irregular income (contractors, commission-based roles, rental-portfolio-only). In a year with $0 other income, a $10K property loss generates $0 refund — but it stores for next year. Our calculator caps the refund at your other-income tax paid, so the displayed number never overstates.

Div 43 comes back at sale — this is not a trap, it’s a feature.

Every dollar of Div 43 (capital works) deducted during holding reduces the cost base of the property at sale under ITAA 1997 s110-45(2). So recapture is real. But the recaptured amount still gets the 50% CGT discount (s115-25) if you’ve held 12+ months, and the underlying tax rate at sale is usually your same marginal rate.

The net effect: you deferred tax at 37%, you pay back roughly 18.5% (half, due to the CGT discount) at your marginal rate at sale. Every dollar of Div 43 claimed creates ~18.5¢ of long-run tax saving. Our 10-year cashflow projector models this explicitly — the year-10 sale box subtracts CGT and shows the net number.

Common mistakes (by refund dollars lost).

1. No quantity surveyor report. Costs ~$700 (deductible itself); typically unlocks $4K-$8K/yr of Div 43 you can’t substantiate otherwise. 5-year ROI: ~25x.
2. Single-name ownership of an investment when a partner is on a lower rate.Joint ownership splits the loss 50/50, refunded at each partner’s own marginal rate — usually $1,500-$4,000/yr of additional refund when paired with a non-working partner.
3. Treating repair as improvement (or vice versa).Replacing a broken tap: repair, deductible immediately. Re-plumbing the bathroom: improvement, goes to CGT cost base. Getting it wrong either over-states this year’s refund or under-states next year’s. Accountants catch this at tax time; you should catch it at spending time.
4. Including principal repayments in deductions. Principal is not an expense. Only interest is. Most self-built spreadsheets double-count and over-state the refund.
5. Forgetting the refund caps at other-income tax paid.A $20K property loss at 45% marginal doesn’t produce a $9K refund if you only paid $6K of tax. The excess $3K carries forward.

Is negative gearing worth it at 6%+ rates?

Higher rates make the loss bigger, which makes the refund bigger — but cash outflow grows faster than the refund. A property with $40K/yr interest creates a $14,800 refund at 37% marginal; you still find $25,200 out of pocket. Whether it’s worth it depends on capital growth.

Run the 10-year projector at conservative growth (3%) and see if the IRR clears 7%. If yes, you can afford the holding cost. If no, the property needs stretch growth to pay off — which isn’t a plan, that’s a hope. Cashflow tools are for the patient; capital growth tools are for the speculative.

And the politics question.

We don’t model policy we don’t have. The rules as enacted for 2025-26 leave negative gearing intact. Labor’s 2019 platform proposed grandfathering existing investors and was dropped after the loss. If the rules change, our calculator will be updated within the quarter and the change will be visible in the How it works section of every relevant tool. Decide on today’s rules; you can’t hedge against every hypothetical amendment without hedging yourself out of investing entirely.

The short version.

Negative gearing is a loss offset, mechanically identical to what shares or businesses get. Twelve deduction lines, each cited to ITAA 1997. Refund equals loss × marginal rate, capped at tax paid. Div 43 comes back at sale but the 50% CGT discount softens it. The money isn’t in the refund; it’s in the leveraged capital growth the refund makes affordable to hold.

Run your numbers before you offer, not after.