What do positive and negative gearing actually mean for your tax and your bank account?
A rental is negatively geared when its deductible costs are more than the rent, so it makes a loss for tax. That loss can generally reduce the tax on your other income, but you only get back your tax rate on each dollar lost, so you are still out of pocket. Positively geared means the rent is more than the costs, so you pay tax on the profit.
The short version
- The $15,400 loss cuts Alex's tax by $4,928, which is 32 cents for each dollar of loss.
- Even after the tax saving, Alex puts in about $6,472 of his own money this year, about $124 a week.
- From the 2027-28 income year, losses on established homes bought after 7:30pm on 12 May 2026 can't reduce your salary. Our article on the 2027 changes explains who is affected.
“It's negatively geared, so it pays for itself at tax time.” You'll hear it at every barbecue. It isn't quite right, and the gap between the tax story and the bank account story is where a lot of new landlords get a nasty surprise.
Here is what the two terms mean, and a worked example for 2026-27 showing both the tax and the cash.
The two terms in one line each
- Negatively geared: rent is less than the deductible costs, including loan interest. The ATO says the tax result is that a net rental loss arises.
- Positively geared: rent is more than the deductible costs, so you have net rental income to pay tax on.
“Neutrally geared” just means the two roughly cancel out. All three are about tax, worked out once a year. None of them tells you whether the property is a good or bad idea for you.
What happens to a rental loss
For 2026-27, if your rental makes a loss you can generally deduct it against your other income, such as salary, wages or business income. If your other income isn't enough to absorb the loss, it carries forward to the next year.
The key point is how much that is worth. A $1 loss doesn't give you $1 back. It reduces your taxable income by $1, which saves you tax at your marginal rate plus the 2% Medicare levy. On a $90,000 income in 2026-27 that is 30% plus 2%, so 32 cents for each dollar of loss.
That also means the same loss is worth different amounts to different people. Someone in the 37% bracket gets back more of each dollar lost than someone in the 15% bracket. But nobody gets back the whole dollar, whatever their income.
Worked example: the tax effect
Worked example
Alex's negatively geared unit, 2026-27
Example only. Alex has a taxable income of $90,000 from salary before the rental. The rental earns $550 a week for 52 weeks. Interest is $33,000, other costs (rates, insurance, agent, repairs) are $7,000 and capital works is $4,000. Uses 2026-27 resident rates plus the 2% Medicare levy, and ignores offsets and the Medicare levy surcharge. Example only.
| Step | Sum | Result |
|---|---|---|
| Rent for the year | $550 x 52 | $28,600 |
| Total deductions | $33,000 + $7,000 + $4,000 | $44,000 |
| Net rental loss | $28,600 minus $44,000 | $15,400 loss |
| Tax and Medicare on $90,000 | $4,020 + 30% x $45,000, plus 2% x $90,000 | $19,320 |
| Taxable income with the rental | $90,000 minus $15,400 | $74,600 |
| Tax and Medicare on $74,600 | $4,020 + 30% x $29,600, plus 2% x $74,600 | $14,392 |
| Tax saving | $19,320 minus $14,392 | $4,928 |
The $15,400 loss cuts Alex's tax by $4,928, which is 32 cents for each dollar of loss.
Check figures for your own situation with the ATO or a registered tax agent.
Worked example: the cash effect
Now the bank account. Capital works is a paper deduction. Alex claims it, but no money leaves the account for it this year. The interest and other costs are real money going out.
Worked example
Alex's cash after tax
Example only. Same property and year as above. Capital works is left out because no cash is spent on it this year. The loan is treated as interest only.
| Step | Sum | Result |
|---|---|---|
| Cash costs | $33,000 + $7,000 | $40,000 |
| Cash short before tax | $28,600 minus $40,000 | $11,400 short |
| Add back the tax saving | $11,400 minus $4,928 | $6,472 still out of pocket |
| Per week | $6,472 / 52 | about $124 |
Even after the tax saving, Alex puts in about $6,472 of his own money this year, about $124 a week.
Principal repayments would add to the cash going out.
So after the tax saving, Alex is still about $6,472 a year out of pocket, or about $124 a week. The tax system softened the loss. It didn't cancel it. As Moneysmart puts it, “Although you may be able to claim tax deductions on expenses, you'll still have to pay them up front.”
Positive gearing and the tax bill
Flip it around. If rents rise or the loan shrinks, the property can tip into a profit, and that profit is added to your taxable income.
Worked example
the positively geared version
Example only. Same as Alex's example, but the interest is $15,000 instead of $33,000. Everything else is unchanged. Example only.
| Step | Sum | Result |
|---|---|---|
| Net rental income | $28,600 minus $15,000 minus $7,000 minus $4,000 | $2,600 profit |
| Extra tax and Medicare | $2,600 x 32% | $832 |
| Cash surplus before tax | $28,600 minus $15,000 minus $7,000 | $6,600 |
| Cash surplus after tax | $6,600 minus $832 | $5,768 |
With a smaller loan Alex has a $2,600 taxable profit and pays $832 more tax, but keeps a $5,768 cash surplus.
The $832 assumes all of the profit is taxed at 30% plus 2%, which holds here because $92,600 is still under $135,000.
Positive gearing isn't free money either. It usually means a tax bill at the end of the year, because no tax was taken out of the rent along the way. Setting some of the surplus aside each month avoids the July shock.
Gearing moves over time
A property isn't stuck as negatively or positively geared. The label follows the numbers, and the numbers move.
- Rent tends to go up over the years, which shrinks a loss.
- Interest rates go up and down, and a lower balance means less interest.
- Depreciation claims usually shrink as items wear out, and capital works stops once its 40 years run out, which pushes the tax result towards a profit even when the cash hasn't changed.
- A big repair or a long vacancy can flip a positive year into a negative one.
So it is worth redoing the sums each year, not just when you buy. The tax picture you were shown at purchase may not be the one you have now.
Check your own numbers in five steps
- Add up a year of rent, before the agent takes anything out.
- Add up the cash costs: interest, rates, insurance, strata, agent fees, repairs.
- Add the paper deductions: capital works and depreciation from your schedule.
- Rent minus all deductions is your tax result. Multiply a loss by your marginal rate plus 2% for a rough tax saving, or a profit by the same for a rough tax bill.
- Rent minus cash costs, plus the tax saving (or minus the tax bill), is roughly what the property does to your bank account.
Step 5 is the number to put in your budget. It is usually the one nobody mentions.
Things that change the picture
- Principal repayments are cash out, but they are not deductible. On a principal and interest loan, the cash gap is bigger than the example shows.
- Depreciation and capital works reduce your tax without using cash this year, which is why a property can be positively geared for cash but negatively geared for tax.
- Vacancies and repairs hit the cash first. Moneysmart warns not to rely on rental income to cover the mortgage.
- HELP repayments: your repayment income includes net rental losses, so a rental loss doesn't reduce your HELP repayment the way it reduces your tax.
- Getting it each pay: if you're negatively geared, you can apply to the ATO for a PAYG withholding variation so less tax comes out of each pay, instead of waiting for one refund.
This is general information about how the tax works, not advice on whether to buy, keep or sell. For your own numbers, check with the ATO or a registered tax agent.
Key numbers
| What | Figure and source |
|---|---|
| Negative gearing produces a net rental loss | Net rental loss ATO |
| Rental loss deductible against other income | Salary, wages, business income ATO |
| Unabsorbed loss carried forward | Next income year ATO |
| PAYG withholding variation | Can apply ATO |
| 2026-27 resident rates | $4,020 plus 30c for each $1 over $45,000 (to $135,000) ATO |
| Medicare levy | 2% ATO |
Free official help
- ATO: Other tax considerations (rental properties 2026)
The ATO's explanation of negative gearing, losses and PAYG withholding variations. - ATO: Work out your net rental income or loss
The ATO worksheet for gross rent minus total expenses. - ATO: Tax rates for Australian residents
The 2026-27 resident tax rates used in the example. - Moneysmart: Buying an investment property
Costs, cash flow and risks to think about, from ASIC's Moneysmart.
Questions people ask
Do I make money from negative gearing?
Not from the loss itself. You get back your marginal tax rate on each dollar lost, so the rest of the loss still comes out of your pocket.
Can I get my negative gearing refund each pay?
You can apply to the ATO for a PAYG withholding variation so less tax is taken from each pay to match your expected loss.
Why does my positively geared property mean a tax bill?
Rent is paid to you without tax taken out, so tax on the profit is worked out when you lodge your return.
Does depreciation cost me cash?
Not in the year you claim it. Capital works and depreciation reduce your taxable income without money leaving your account that year.
Is negative gearing ending?
Not for 2026-27. From 2027-28, losses on established homes bought after 7:30pm on 12 May 2026 can only be used against residential property income and residential capital gains, with the excess carried forward.
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Sources
- Other tax considerations, Rental properties guide 2026, ATO. https://www.ato.gov.au/forms-and-instructions/rental-properties-2026/other-tax-considerations, accessed 2026-10-16.
- Worksheet: work out your net rental income or loss, ATO. https://www.ato.gov.au/forms-and-instructions/rental-properties-2026/worksheet-work-out-your-net-rental-income-or-loss, accessed 2026-10-16.
- Tax rates for Australian residents, ATO. https://www.ato.gov.au/tax-rates-and-codes/tax-rates-australian-residents, accessed 2026-10-16.
- Buying an investment property, Moneysmart. https://moneysmart.gov.au/property-investment/buying-an-investment-property, accessed 2026-10-16.
- Study and training support loans rates and repayment thresholds, ATO. https://www.ato.gov.au/tax-rates-and-codes/study-and-training-support-loans-rates-and-repayment-thresholds, accessed 2026-10-16.
- Treasury Laws Amendment (Tax Reform No. 1) Act 2026, Federal Register of Legislation. https://www.legislation.gov.au/C2026A00049/asmade/text, accessed 2026-10-16.