Negative gearing has long been a cornerstone of Australian property investment strategy. The idea is straightforward: if the cost of holding an investment property is higher than the rent it earns, the loss can be offset against your other income, reducing your overall tax. But with interest rates significantly higher than the ultra-low environment of 2020–21, the calculus has changed. Does negative gearing still make financial sense in 2026?
What negative gearing actually is
A property is "negatively geared" when its deductible costs — loan interest, rates, insurance, management fees, repairs and depreciation — exceed the rent it produces. That net rental loss can generally be deducted against your other assessable income, such as your salary. The tax system effectively shares part of the loss with you, but it is still a loss: you are out of pocket in cash terms and hoping capital growth more than makes up the difference over time.
The real numbers on a $900k property
Let's model a $900,000 investment property in Sydney with a $720,000 interest-only loan at 6.1% per annum (an indicative rate as at early 2026 — always check current market rates):
- Annual interest cost: $43,920
- Rates, insurance, property management and maintenance: roughly $12,000
- Total holding costs: $55,920
Against a rental yield of 3.2% (typical for Sydney), annual rent is about $28,800. That leaves an annual shortfall — the negatively geared amount — of around $27,120.
What the tax saving really does
At a marginal tax rate of 39% (including the Medicare levy), deducting that $27,120 loss saves roughly $10,577 in tax. That sounds helpful, and it is — but read it carefully. The saving does not erase the loss; it reduces the after-tax cost of holding the property from $27,120 to about $16,543 a year. You are still paying around $16,500 out of your own pocket annually for the privilege of owning the asset.
The real question is growth
This is the point many investors skip. Negative gearing only works as a wealth strategy if capital growth exceeds your after-tax holding cost. On these numbers, the property needs to grow by more than roughly $16,500 a year — just under 2% on a $900,000 property — simply for you to break even, before you have made a cent. In a strongly rising market that is easy; in a flat or falling one, you are funding a loss with no offsetting gain. Higher interest rates have pushed that break-even hurdle up considerably compared with a few years ago.
Things to weigh before you buy
- Cash flow: can you comfortably fund the shortfall every year, including if rates rise further or the property sits vacant?
- Your marginal rate: the higher your income, the more a deduction is worth — negative gearing does far less for someone on a low rate.
- The growth outlook: a deduction is never a reason to buy a property that would not grow on its own merits.
- Your timeframe: property is a long-term, relatively illiquid asset; short holding periods rarely suit a geared strategy.
The bottom line
Negative gearing is a legitimate strategy, but it is a cash-flow cost in exchange for a bet on growth — not a tax trick that makes a property free. In 2026's higher-rate environment, the numbers demand more from the growth side of the equation than they did in the past. Run your own figures before you commit, and make sure the underlying investment stacks up on its own.
If you are weighing up an investment property and want the after-tax numbers modelled honestly first, we are happy to help you run them. Book a chat at nebulaaccounting.au or call 0433 822 227.
This article is general information only and does not take account of your personal circumstances — it is not personal tax, financial or legal advice. Tax laws change and apply differently to different people. Nebula Accounting Pty Ltd is a registered tax agent (No. 26259377); please speak with us or check with the ATO before acting.