Sign up to newsletter

Updated 10 November 2026 | Australian investment guide | 2026–27 financial year

Negative gearing means borrowing to invest where the investment’s deductible expenses exceed its assessable income. The resulting tax loss may reduce tax on other income under the applicable rules. It does not make the investment free, eliminate its cash shortfall or guarantee that its value will grow.

This guide explains the mechanics using property and share examples, then looks at loan records, capital gains, risks and alternatives. The purpose is to help you ask better questions before taking on investment debt.

A significant change is already legislated

From 1 July 2027, new rules will restrict the use of losses from many established residential properties against other income, with exemptions and transitional protection. Capital gains tax arrangements also change for gains accruing from that date. These are enacted changes, not simply Budget proposals. The ATO’s reform overview confirms their status. Read Chapter 6 before relying on a long-term tax projection.

Before acting: this ebook provides general information only, without considering your objectives, financial situation or needs. It is not a recommendation to borrow, buy an asset or use a particular loan structure. Obtain personal financial, credit and tax advice as appropriate, and read relevant loan and investment documents. All examples are hypothetical; their interest rates and returns are assumptions, not current offers or forecasts.

Separate three different results

• Cash flow: money actually received and paid, including loan principal repayments.
• Taxable income or loss: assessable income less deductions allowed under tax law. Some deductions are spread over time; some do not involve a current cash payment.
• Total investment outcome: income, changes in asset value, all costs and tax over the full holding period.

A property can have a tax loss but a different cash result. A principal repayment uses cash but is not an interest deduction. Conversely, an eligible capital works deduction can reduce taxable income without a matching cash payment that year. A paper capital gain cannot pay the month’s mortgage unless you can access money separately.

ASIC’s Moneysmart guide to investing and tax explains how income, deductions and capital gains interact. An allowed deduction reduces taxable income; it does not reimburse the whole expense. At an assumed 32% marginal tax-and-levy rate, a fully usable $1,000 deduction saves $320 and still leaves $680 of cost.

Check the asset before its tax treatment

Start with why you would own the asset, its risks and realistic expected returns. Then assess whether borrowing is appropriate. A deduction cannot rescue an asset whose returns are insufficient after all costs and tax. Comparing a geared strategy with investing smaller amounts without borrowing is a useful part of the decision.

Andy has $100,000 of taxable income before a rental investment. He is an Australian resident individual. For this simplified 2026–27 example, assume he can fully deduct the following rental costs, has no offsets or other relevant adjustments, and pays the full 2% Medicare levy.

• Property purchase price: $600,000.
• Investment borrowing: $630,000, including an assumed $30,000 of acquisition costs.
• Annual interest at an assumed 6%: $37,800.
• Rent received: $18,000.
• Other deductible cash expenses: $3,000.

The assumed costs are illustrative, not an estimate of the cost of owning a particular property. The example excludes principal repayments, depreciation, vacancies, major repairs, selling costs and capital gains. Loan approval, security and deductibility require separate assessment.

The annual result

Rent of $18,000 less interest of $37,800 and other expenses of $3,000 produces a $22,800 loss. On these assumptions, taxable income falls from $100,000 to $77,200.

Using the 2026–27 Australian resident income tax rates, income tax plus the assumed Medicare levy is $22,520 on $100,000, and $15,224 on $77,200. The difference is $7,296, leaving an annual after-tax cash shortfall of $15,504, or $1,292 per month.

This calculation isolates the income-tax and levy effect. Investment losses may be added back for other income tests, and actual tax can differ. Andy must fund expenses when due, even if a tax benefit is received later.

What if interest rises?

At an assumed 8%, interest on the same $630,000 balance becomes $50,400. Keeping other assumptions unchanged, the cash loss rises to $35,400. If all of that loss still reduces income taxed at 30% plus the full 2% levy, the after-tax shortfall is $24,072, or $2,006 per month.

A rise in property value equal to the annual shortfall would not establish overall profitability. Andy must also account for purchase and sale costs, tax on gains, the timing of cash flows and the opportunity cost of his money. Moneysmart’s investment property guide explains the costs and risks to include.

Gearing can apply to different investments. Property and shares can produce income and changes in capital value, but neither promises enough growth to cover borrowing costs. Historical averages do not predict the return from a particular property, company, fund or investment period.

Look beyond an attractive headline return

A total return figure may include rent or dividends. Do not add that income again when comparing the figure with interest costs. Also check whether a quoted return is before or after fees, tax, maintenance and transaction costs, and whether it assumes income is reinvested. The result for a borrowed investment can differ substantially.

An index fund aims to follow its benchmark, subject to its structure, costs and tracking differences. It does not promise the benchmark’s historical average return in future. A single residential property is also a concentrated investment, even when national house prices rise.

Diversification still matters

Consider your home, business, super and other investments together. Adding another property in the same area or shares in the same industry may increase concentration. Diversification spreads exposure across investments, sectors and markets; it can reduce some risks but cannot prevent every loss or remove the obligation to repay a loan.

The useful question is not which asset class “wins”. It is whether the investment and debt fit your needs, financial capacity, timeframe and ability to withstand adverse outcomes.

Agnetha has $100,000 of taxable income before investing. She borrows $200,000 to buy an income-producing share portfolio. Assume the portfolio pays $8,000 of ordinary unfranked dividends, loan interest is $12,000 and fully deductible, and there are no other costs or tax adjustments.

The annual cash and tax loss is $4,000. If the full loss reduces income taxed at 30% plus the full 2% Medicare levy, the tax reduction is $1,280. Her after-tax cash shortfall is therefore $2,720. This is an assumed year’s result, not a projection.

If the shares fall 10%, their value drops by $20,000 while the $200,000 loan remains. The year’s shortfall does not disappear. If the loan is secured on her home, her home is exposed to enforcement if she cannot meet her obligations; using that security does not make the investment safer.

Dividends are different from fund distributions

Actual dividends may be partly or fully franked. Managed fund and ETF distributions can contain several tax components, including capital gains and foreign income, so the cash paid may differ from the amount to report. Use the investment’s tax statement rather than treating every distribution as a simple dividend.

Franking credits reflect company tax already paid. Eligible investors generally include the dividend and credit in assessable income, then claim the credit as a tax offset. Eligibility and integrity rules apply. The grossed-up taxable amount is not extra cash paid with the dividend, and credits do not guarantee positive after-tax cash flow.

Review the ATO’s investment income deduction guidance before assuming loan interest is deductible.

Use of the money matters

The security for a loan and its marketing label do not determine the interest deduction. The relevant connection is generally how the borrowed money is used to earn assessable income. A home-secured borrowing used for an income-producing investment may qualify; borrowing secured on a rental property but spent on a private holiday does not become deductible simply because of that security.

The ATO’s rental interest factsheet also explains that principal repayments are not deductible. Mixed private and investment use requires apportionment and supporting records.

Redraw and repayments can change the calculation

Redrawing money is a new borrowing whose use must be traced. Private redraws can turn an otherwise investment loan into a mixed-purpose account. Repayments to a mixed-purpose loan generally reduce both portions proportionately: you cannot simply nominate that only the private portion was repaid.

For example, a loan used equally for private expenses and investments has a 50:50 split before any other changes. A $20,000 repayment generally reduces each portion by $10,000. The ATO ruling TR 2000/2 covers redraw facilities and mixed-purpose borrowings.

Separate loan accounts can make tracing easier, but do not create deductions by themselves. Keep evidence showing drawdowns, transfers and the actual investment expenditure. Obtain advice before refinancing, using redraw or implementing “debt recycling”. Capitalising interest or arranging loans mainly to increase deductions can raise additional tax issues; this guide is not a recipe for such a structure.

Not every property cost is immediately deductible

Initial repairs, improvements, acquisition costs and borrowing expenses can have different treatment from routine repairs or other operating expenses. Eligible capital works and depreciating assets may be deducted over time, subject to restrictions. The ATO’s repairs, maintenance and capital expenditure guide explains the distinctions. Private use and periods not genuinely available for rent can also restrict claims.

Current rules are not a lifetime promise

For eligible Australian resident individuals, the current CGT discount can generally reduce a remaining capital gain by 50% after holding the asset for at least 12 months and applying relevant capital losses. It is a discount to the gain, not a fixed tax rate. The taxable result joins other income and may cross tax brackets. A capital loss generally cannot reduce salary income. See the ATO’s CGT discount guidance.

A sale is not the only possible CGT event: gifts and other disposals can also matter. Keeping an asset indefinitely does not remove other tax, ownership, liquidity or estate-planning considerations.

Scheduled residential loss restrictions

The Tax Reform No. 1 Act 2026 legislates restrictions from 1 July 2027. Broadly, losses relating to established residential dwellings acquired after 7:30 pm AEST on 12 May 2026 are quarantined to the relevant residential property tax regime instead of reducing wages or unrelated income. Unused amounts can be carried forward. New builds and other specified cases are exempt.

Homes held before the announcement generally retain the previous negative-gearing treatment, subject to the detailed rules. Acquiring an established home between announcement and 30 June 2027 does not generally preserve unrestricted deductions in later years. Acquisition timing, ownership transfers and exemptions require careful checking; later 2026 amendments address specific situations.

Scheduled CGT changes

The legislation also replaces the 50% discount with inflation-based cost-base adjustment and a minimum 30% tax framework for relevant gains accruing from 1 July 2027. Transitional rules split pre- and post-change gains, with different options for eligible new residential property. The government tax explainer outlines the transition. Do not apply today’s discount to every future gain in a long-term property or share projection. Obtain tax advice on your asset, ownership and acquisition history.

Borrowing magnifies gains and losses. You remain responsible for repayments even when the asset falls or stops producing income. ASIC describes borrowing to invest as a high-risk strategy, especially where the investor cannot withstand a poor outcome.

• Income: could you cover commitments during vacancy, lower dividends, illness or unemployment?
• Interest: what happens if rates rise by two or four percentage points?
• Value: could you withstand a substantial fall without having to sell?
• Exit: what would remain after selling costs, debt repayment and tax?
• Security: which assets, guarantees and household finances are exposed?

A margin loan can trigger a demand for extra security or repayment when its loan-to-value limit is breached. The lender may sell investments if you cannot respond. Do not confuse this with an ordinary home-secured investment loan; the contracts and enforcement rights differ.

An interest-only period postpones principal repayment rather than removing it. When it ends, repayments can rise materially. Compare both phases using Moneysmart’s interest-only loan guidance, and avoid assuming refinancing will always be available.

A lender’s approval is not a personal investment recommendation. Include fees, reserves and other goals in your own assessment. There is no universal rule that a return a fixed number of percentage points above the loan rate makes gearing appropriate.

A positively geared investment produces income exceeding its deductible holding costs. A taxable profit does not necessarily mean positive cash flow after principal repayments, capital spending and tax. Likewise, franking credits can change the tax outcome without changing the dividend cash initially received.

Positive income does not protect the capital value, and a promised high yield can conceal risk. Assess the source and reliability of the income, costs, liquidity and the product’s terms. Ask what happens if distributions stop while loan payments continue.

Make the decision in the right order

1. Define the goal and timeframe.
2. Review the investment on its own merits.
3. Compare borrowing with an unborrowed alternative.
4. Test poor outcomes and confirm accessible reserves.
5. Check current and scheduled tax treatment, loan purposes and records.
6. Review the plan when income, rates, laws or family circumstances change.

Developing an investing plan helps put these decisions in context. Reducing tax is one input, rather than the objective of losing money.

Before committing to investment debt, discuss the complete plan with qualified advisers. Bring your budget, existing loan statements, proposed investment costs and ownership details. Ask for an explanation of the risks and after-tax cash flow that you can understand and revisit.