Negative Gearing and the CGT Discount: What Australian Property Investors Need to Know in 2026
Negative gearing and the 50% capital gains tax (CGT) discount are two of the most significant tax concessions available to Australian property investors. Together, they fundamentally shape how Australians invest in real estate, and they have been at the centre of political debate for over a decade.
In 2026, with interest rates rising, property price growth slowing in key markets, and the government having just passed major superannuation tax reforms (Division 296), the question of whether negative gearing and the CGT discount will survive in their current form is more relevant than ever.
This guide explains exactly how both concessions work, quantifies their financial impact, examines the political landscape, and provides practical strategies for property investors navigating the current environment.
How Negative Gearing Works
The Basic Mechanics
Negative gearing is not a special tax concession or loophole. It is simply the application of a general tax principle: if you borrow money to earn income, the costs of that borrowing (and other expenses) are tax-deductible.
When the total deductible costs of owning an investment property exceed the rental income, the property is “negatively geared.” The net loss reduces your total taxable income, which reduces the tax you pay on your salary, business income, or other earnings.
Example for 2025-26:
| Item | Annual Amount |
|---|---|
| Rental income | $32,000 |
| Less: Mortgage interest (6.4% on $500,000) | -$32,000 |
| Less: Council and water rates | -$3,200 |
| Less: Insurance | -$1,800 |
| Less: Property management (7%) | -$2,240 |
| Less: Repairs and maintenance | -$2,000 |
| Less: Depreciation (building + fixtures) | -$8,000 |
| Net rental loss | -$17,240 |
If the investor earns $160,000 in salary, the $17,240 loss reduces their taxable income to $142,760. At the 37% marginal rate, this saves $6,379 in tax.
The investor is still out of pocket (they are paying more in costs than they receive in rent), but the tax saving reduces the real cost of holding the property. The strategy relies on the property increasing in value over time, with the eventual capital gain (taxed at a discount) more than compensating for the annual holding losses.
What You Can Deduct
The ATO allows a comprehensive range of deductions for investment property owners. Understanding and claiming all eligible deductions is critical to maximising the negative gearing benefit.
Immediately deductible expenses:
| Expense | Typical Annual Cost |
|---|---|
| Mortgage interest | Varies (largest deduction) |
| Council rates | $1,500 - $3,500 |
| Water rates and charges | $800 - $1,500 |
| Strata/body corporate levies | $2,000 - $8,000 |
| Landlord insurance | $1,200 - $2,500 |
| Property management fees | 5-10% of rent |
| Repairs and maintenance | Varies |
| Pest control | $200 - $500 |
| Advertising for tenants | $200 - $500 |
| Legal fees (lease preparation) | $300 - $800 |
| Land tax | Varies by state |
Deductible over time (capital works and depreciation):
| Item | Deduction Rate |
|---|---|
| Building (constructed after 1985) | 2.5% per year over 40 years |
| Carpet | 10 years |
| Hot water system | 12 years |
| Air conditioning | 10 years |
| Blinds and curtains | 5-10 years |
| Kitchen appliances | 5-12 years |
| Fencing | 20-30 years |
A professional depreciation schedule from a quantity surveyor typically costs $400 to $800 and can identify $5,000 to $15,000 in annual depreciation deductions for properties less than 10 years old. For a property investor on the 37% marginal tax rate, that is $1,850 to $5,550 in additional tax savings per year, making the depreciation schedule one of the highest-return investments available.
Note on second-hand depreciation: Since 1 July 2017, investors who purchase existing (second-hand) properties can no longer claim depreciation on existing plant and equipment assets (like air conditioning units or carpet) that were installed by a previous owner. However, capital works deductions (the building itself at 2.5%) remain claimable regardless, and any new fixtures the investor installs are fully depreciable.
The Scale of Negative Gearing in Australia
Negative gearing is not a niche strategy. According to ATO taxation statistics:
- Approximately 2.2 million Australians own at least one investment property
- Around 1.1 million of those properties are negatively geared in any given year
- Total net rental losses claimed by Australian taxpayers exceed $7 billion annually
- The average net rental loss is approximately $6,000 to $7,000 per investor per year
- The tax revenue forgone from negative gearing is estimated at $2.7 billion per year by the Parliamentary Budget Office
These numbers underscore how deeply embedded negative gearing is in Australian property investment culture and the tax system.
How the 50% CGT Discount Works
The Mechanics
When an individual Australian taxpayer sells a capital asset (including an investment property) that has been held for more than 12 months, they apply a 50% discount to the capital gain before including it in their taxable income.
Detailed CGT calculation example:
| Step | Amount |
|---|---|
| Sale price | $950,000 |
| Less: Purchase price | $650,000 |
| Less: Stamp duty on purchase | $25,000 |
| Less: Legal fees (purchase + sale) | $4,000 |
| Less: Capital improvements (new bathroom) | $18,000 |
| Capital gain | $253,000 |
| Less: 50% CGT discount | -$126,500 |
| Taxable capital gain | $126,500 |
If the investor’s other taxable income is $150,000, the $126,500 taxable gain pushes total income to $276,500. The tax on the capital gain portion (at marginal rates of 37% and 45%) would be approximately $52,000 to $55,000.
Without the CGT discount, the full $253,000 gain would be taxable, resulting in approximately $104,000 to $110,000 in tax, roughly double.
Who Gets the Discount
| Entity Type | CGT Discount |
|---|---|
| Individual | 50% |
| Trust (distributed to individual beneficiaries) | 50% |
| Complying super fund | 33.3% (effective 10% rate on 15% base) |
| Company | 0% (no discount) |
| Non-resident individual (assets acquired after 8 May 2012) | 0% |
This is why most individual property investors hold properties in their personal name or through a trust, rather than through a company. The CGT discount effectively halves the tax on long-term capital gains.
Historical Context
The 50% CGT discount was introduced on 21 September 1999 by the Howard Government, replacing the previous system where capital gains were indexed to inflation using the Consumer Price Index. The rationale was simplification, but critics argue the flat 50% discount is more generous than inflation indexation would have been in most periods, particularly during low-inflation environments.
Before September 1999, investors could choose between indexation (adjusting the cost base for inflation) or paying tax on the nominal gain. Properties purchased before this date may still be eligible for the indexation method, which can sometimes produce a better outcome than the 50% discount, depending on the period of ownership and inflation rates.
The Interaction Between Negative Gearing and the CGT Discount
The real power of these two concessions lies in how they work together.
The strategy in simple terms:
- Buy an investment property with borrowed funds
- Claim annual losses (negative gearing) against your income, reducing your tax each year
- Hold the property for the long term as it appreciates in value
- Sell the property and pay tax on only half the capital gain (50% CGT discount)
10-year worked example:
| Item | Amount |
|---|---|
| Purchase price (2026) | $700,000 |
| Stamp duty and costs | $30,000 |
| Total cost base | $730,000 |
| Annual net rental loss (average) | -$12,000 |
| Tax saving per year (37% rate) | $4,440 |
| Total tax savings over 10 years | $44,400 |
| Sale price (2036, assuming 4% p.a. growth) | $1,036,000 |
| Capital gain | $306,000 |
| Taxable gain (after 50% discount) | $153,000 |
| CGT payable (blended ~40% rate) | $61,200 |
| Net benefit: tax savings minus CGT | -$16,800 |
At first glance, the investor pays more in CGT ($61,200) than they saved through negative gearing ($44,400). But the investor also gained $306,000 in capital appreciation and had the benefit of leverage (using $700,000 of the bank’s money to access a $1,036,000 asset). The after-tax return, even accounting for interest costs and CGT, significantly exceeds what the investor could have achieved with the same equity invested in a savings account or term deposit.
The real return calculation:
| Item | Amount |
|---|---|
| Capital gain after CGT | $244,800 ($306,000 - $61,200) |
| Cumulative tax savings from negative gearing | $44,400 |
| Less: Cumulative out-of-pocket cost (loss minus tax saving) | -$75,600 ($120,000 loss - $44,400 tax saving) |
| Net wealth created | $213,600 |
On an initial equity contribution of $170,000 (20% deposit plus stamp duty and costs), that is a return of approximately 125% over 10 years, or roughly 8.5% per annum compounding, after all costs and taxes.
The Political Landscape in 2026
Current Policy
As of March 2026, the Albanese Labor Government has not moved to change negative gearing or the CGT discount. This is notable because:
- Labor took a policy to the 2019 election to limit negative gearing to new properties only and reduce the CGT discount from 50% to 25%
- That policy was widely seen as a factor in Labor’s unexpected election loss
- Since winning government in 2022, Labor has avoided revisiting the issue
- The government’s focus in early 2026 has been on superannuation tax reform (Division 296) and cost-of-living measures
The Greens’ Position
The Greens continue to advocate for abolishing negative gearing and the CGT discount entirely. As part of their support for the Division 296 super tax legislation in March 2026, the Greens secured commitments from Labor for further tax reform discussions, though no specific commitments on negative gearing were made.
What Could Change
While no changes are imminent, investors should be aware of the political risks:
- Post-election reform: If Labor wins the next federal election (due by May 2028 at the latest), there may be pressure to address housing affordability through negative gearing changes.
- Grandfathering: Any changes would likely be grandfathered, meaning existing investment properties would retain current tax treatment, while new purchases would face different rules.
- CGT discount reduction: Reducing the discount from 50% to 40% or 25% is arguably more likely than outright abolition, as it is simpler to implement and less politically toxic.
- Treasury review: The Treasury has periodically flagged negative gearing and the CGT discount as areas where the tax system could be more efficient, most recently in the 2023 intergenerational report.
For investors making decisions today, the prudent approach is to invest based on the current rules while stress-testing your strategy against potential changes.
The Impact of Rising Interest Rates
The February 2026 RBA rate hike to 3.85% has directly increased the cost of negative gearing. Higher interest rates mean higher mortgage interest deductions, but they also mean higher out-of-pocket costs for investors.
Impact of rate changes on a $500,000 investment loan:
| Cash Rate | Typical Variable Rate | Annual Interest | Monthly Repayment (I/O) | Annual Loss (assuming $32k rent) |
|---|---|---|---|---|
| 3.60% (Dec 2025) | 6.15% | $30,750 | $2,563 | -$16,990 |
| 3.85% (Feb 2026) | 6.40% | $32,000 | $2,667 | -$18,240 |
| 4.10% (May 2026 forecast) | 6.65% | $33,250 | $2,771 | -$19,490 |
| 4.35% (possible) | 6.90% | $34,500 | $2,875 | -$20,740 |
Each 0.25% rate increase adds approximately $1,250 per year to the cost of holding a $500,000 investment property. The tax deduction offsets some of this (37% of $1,250 = $463), but the net out-of-pocket cost still rises by approximately $787 per year per rate hike.
With NAB and Westpac both forecasting further rate hikes in March and May 2026, investors need to budget for potentially $2,500 or more in additional annual holding costs compared to late 2025.
Property Market Context: March 2026
The property market in March 2026 presents a mixed picture for investors:
Price Growth Is Slowing
SQM Research recently downgraded its 2026 housing forecast, predicting capital city dwelling prices will rise between 0% and 3%, down from earlier forecasts of 3% to 6%. The rate hikes are directly dampening buyer demand and reducing borrowing capacity.
State-by-state performance (12-month annualised growth to February 2026):
| State | Median House Price Growth |
|---|---|
| Western Australia | +14.1% |
| Queensland | +8.2% |
| South Australia | +7.5% |
| NSW | +3.1% |
| ACT | +2.8% |
| Tasmania | +1.9% |
| Victoria | +4.5% |
| NT | +5.3% |
Source: HtAG Analytics, CoreLogic
The national typical 3-bedroom house price sits at approximately $835,000 as of February 2026. Perth and Brisbane continue to outperform, driven by interstate migration, mining sector employment, and relative affordability compared to Sydney and Melbourne.
Rental Yields Are Under Pressure
Rental growth has slowed from the double-digit increases of 2022-23 to low single digits in most capital cities. National vacancy rates remain tight at around 1.2% (SQM Research), but tenants are increasingly hitting affordability ceilings, limiting landlords’ ability to raise rents further.
Capital city gross rental yields (March 2026):
| City | Houses | Units |
|---|---|---|
| Sydney | 2.8% | 4.1% |
| Melbourne | 3.1% | 4.5% |
| Brisbane | 3.8% | 5.2% |
| Perth | 4.2% | 5.5% |
| Adelaide | 3.9% | 5.0% |
| Hobart | 3.5% | 4.3% |
Source: SQM Research, CoreLogic
For negatively geared investors, lower yields mean larger annual losses and higher out-of-pocket costs. This is partially offset by higher tax deductions, but the cash flow burden is real.
Strategies for Property Investors in 2026
1. Focus on Cash Flow, Not Just Capital Growth
In a rising rate environment, the traditional Australian approach of accepting large negative gearing losses while waiting for capital growth becomes more expensive. Investors should prioritise properties with strong rental yields (ideally gross yields above 5%) to minimise cash flow strain.
Regional centres like Townsville, Toowoomba, Ballarat, and Bendigo often offer higher yields than capital cities, though capital growth may be more moderate.
2. Get a Depreciation Schedule
If you own a property built after 1985 and do not have a depreciation schedule, you are almost certainly leaving money on the table. A $600 investment in a quantity surveyor report can unlock $5,000 to $15,000 per year in non-cash deductions, significantly improving your after-tax position.
3. Review Your Loan Structure
With rates rising, now is the time to ensure your investment loan is structured correctly:
- Interest-only loans may be appropriate for negatively geared properties, as they maximise the tax-deductible interest and minimise cash outflow. However, they do not build equity.
- Separate loan splits ensure investment debt is clearly separated from personal debt for ATO purposes.
- Offset accounts on your home loan (not your investment loan) can reduce non-deductible interest while keeping investment interest fully deductible.
A mortgage broker can model different loan structures and find competitive rates across multiple lenders.
4. Consider the Holding Period
The 50% CGT discount only applies to properties held for more than 12 months. For maximum benefit, plan for a holding period of at least 7 to 10 years, which allows:
- The CGT discount to apply
- Compound capital growth to build meaningful equity
- Rental income to grow over time (potentially making the property positively geared)
- Market cycles to play out (avoiding selling during a downturn)
5. Stress-Test Against Rate Scenarios
Before purchasing, model your cash flow at current rates AND at rates 1% higher. With the cash rate at 3.85% and forecasts suggesting it could reach 4.10% to 4.35%, your investment should remain viable with variable rates approaching 7%.
Cash flow stress test for a $600,000 property:
| Scenario | Variable Rate | Monthly Shortfall (after tax) | Annual Out-of-Pocket |
|---|---|---|---|
| Current | 6.40% | $850 | $10,200 |
| +0.25% | 6.65% | $920 | $11,040 |
| +0.50% | 6.90% | $990 | $11,880 |
| +0.75% | 7.15% | $1,060 | $12,720 |
If a $2,500 increase in annual holding costs would create financial stress, you may need to reconsider the purchase or look at higher-yielding properties.
6. Plan for Potential Policy Changes
While no changes to negative gearing or the CGT discount are currently proposed, prudent investors should consider:
- Diversifying across asset classes: Do not rely solely on negatively geared property. A balanced portfolio including shares, super contributions, and cash provides resilience against policy changes.
- Building equity faster: Properties that become positively geared quickly are less affected by potential negative gearing changes.
- Holding for the very long term: Grandfathering provisions typically protect existing investors, so the longer you hold, the more likely your current tax treatment is preserved.
Key Takeaways
- Negative gearing and the 50% CGT discount remain available to all Australian property investors in 2026.
- Rising interest rates increase both the cost and the tax benefit of negative gearing, but net out-of-pocket costs are rising.
- The 50% CGT discount effectively halves the tax on investment property gains held for over 12 months.
- No legislative changes to either concession are currently before Parliament, but political risk remains.
- Investors should focus on cash flow sustainability, proper loan structuring, and depreciation claims in the current high-rate environment.
- Professional advice from a mortgage broker (loan structure), accountant (tax optimisation), and buyer’s agent (property selection) can significantly improve outcomes.
Connect With a Property Investment Specialist
Navigating negative gearing, CGT, and loan structuring requires specialist advice. WealthWorks connects you with verified mortgage brokers, accountants, and financial advisers across Australia who specialise in property investment.
Find a mortgage broker for competitive investment loan rates, an accountant for tax-optimised structuring, or a financial adviser for holistic investment strategy.
Frequently Asked Questions
What is negative gearing in Australia and how does it reduce tax?
Negative gearing occurs when the costs of owning an investment property (mortgage interest, maintenance, depreciation, insurance, property management fees) exceed the rental income it generates. The resulting loss can be offset against your other income, including salary and wages, reducing your overall taxable income. For example, if your investment property generates a $15,000 annual loss and you earn $150,000 in salary, your taxable income drops to $135,000. At the 37% marginal tax rate, that saves you $5,550 in tax. This is permitted under general Australian tax law (Section 8-1 of the Income Tax Assessment Act 1997).
Is negative gearing being abolished in Australia in 2026?
As of March 2026, negative gearing has not been abolished and remains available to all Australian property investors. The Albanese Labor Government has not introduced legislation to change negative gearing, despite previous Labor policy (taken to the 2019 election) to limit it to new properties only. The Greens continue to advocate for abolishing negative gearing entirely, but no legislation is currently before Parliament. However, political risk remains, and any future policy changes could be grandfathered (existing arrangements protected) or applied prospectively.
How does the 50% CGT discount work for property investors in Australia?
When an Australian individual sells an investment property held for more than 12 months, only 50% of the capital gain is included in their taxable income. For example, if you buy a property for $600,000 and sell it for $900,000, the $300,000 capital gain is reduced to $150,000 after the discount. If your marginal tax rate is 37%, you pay $55,500 in CGT instead of $111,000 on the full gain. The discount applies to individuals and trusts but not to companies. It was introduced by the Howard Government in 1999 to replace the previous indexation method.
Can you claim negative gearing on a holiday rental property in Australia?
You can claim deductions on a holiday rental property in Australia, but only for the periods the property is genuinely available for rent at market rates. The ATO scrutinises holiday rental claims closely. If the property is used privately for part of the year, deductions must be apportioned. If the property is only available for short periods or is priced above market rates to discourage bookings, the ATO may disallow deductions entirely. Properties in popular holiday locations like the Gold Coast or Byron Bay attract particular ATO attention under their rental property compliance program.
What property tax deductions can Australian investors claim besides mortgage interest?
Australian property investors can claim a wide range of deductions beyond mortgage interest, including: council rates, water rates, strata levies, landlord insurance, property management fees (typically 5-10% of rent), repairs and maintenance (but not improvements), depreciation on the building (2.5% per year for properties built after 1985) and fixtures/fittings (varied rates), pest inspections, advertising for tenants, legal fees for lease preparation, travel costs for inspections (limited since 2017 changes), and borrowing costs (spread over 5 years or the loan term, whichever is shorter). A quantity surveyor's depreciation schedule (costing $400-$800) can unlock $5,000-$15,000 in annual depreciation deductions for newer properties.
Should Australian property investors use a trust or personal name for negative gearing?
For negatively geared properties, personal ownership is generally more tax-effective because the loss can be offset against your personal income immediately. In a trust, negative gearing losses are trapped within the trust and cannot be distributed to beneficiaries to offset their other income. The loss carries forward within the trust until the trust has net income. However, trusts offer advantages for positively geared properties (income distribution flexibility) and for capital gains (CGT streaming to lower-taxed beneficiaries). Many Australian investors start with personal ownership while the property is negatively geared, then consider trust structures for subsequent positively geared properties.
