Understanding the Basics of Negative Gearing

What Negative Gearing Actually Means

Negative gearing happens when the costs of owning a rental property exceed the rental income it generates, creating a taxable loss you can claim against your other income. Until recently, this meant an investor earning a salary could offset their property's annual shortfall against their wages, reducing their overall tax bill. The rules changed in the 2026-27 Federal Budget, and if you're considering investment loans for established property bought after 12 May 2026, those losses can now only be offset against rental income or capital gains from residential property from 1 July 2027 onwards.

For someone buying in Marmion, where rental yields on coastal property tend to sit below the holding costs once you factor in loan repayments, strata fees, insurance, and maintenance, most investors will run at a loss in the early years. That's not necessarily a problem if you're holding for long-term capital growth, but the tax treatment of that loss now depends on when you bought and what type of property you chose.

How the Numbers Work on a Negatively Geared Property

Consider a buyer who purchases an established two-bedroom apartment near Marmion Village. They borrow most of the purchase price using an investment loan at current variable rates, set up on an interest-only structure to keep repayments lower in the short term. Rental income might cover around 60% of the annual holding costs, leaving a gap of several thousand dollars each year.

Under the old rules, that gap reduced taxable income from their day job, so someone on a marginal tax rate of 37% would effectively get back 37 cents for every dollar of loss through a lower tax bill. Under the new rules applying from 1 July 2027, that same loss can only be used to offset income from other residential rental properties or future capital gains when the property is eventually sold. The loss doesn't disappear, it just gets carried forward rather than providing an immediate tax reduction.

This shifts the appeal of negative gearing toward investors who already own multiple properties or who are confident about capital growth over a longer hold period, rather than those relying on annual tax relief to make the numbers work.

Why Investors Still Accept a Loss Each Year

The reason people continue to buy negatively geared property is that the annual shortfall is typically smaller than the capital gain they expect over time. Marmion's proximity to the coast, established infrastructure, and limited new development sites mean property values have historically appreciated, even if rental yields remain modest.

An investor might accept a $5,000 annual loss if they believe the property will appreciate by $30,000 or more over the same period. The loss carried forward under the new rules can then offset part of the capital gains tax when the property is sold, assuming they hold beyond the twelve-month mark to access whatever CGT arrangements apply at that time. For properties bought before Budget night in May 2026, the old 50% CGT discount still applies to any gain accrued up to 1 July 2027, which provides some transitional relief.

The shift in tax treatment means the strategy now leans more heavily on growth rather than cashflow management, which suits certain buyers but not others. If your income is variable or you don't have the buffer to cover ongoing losses without immediate tax relief, this approach becomes harder to sustain.

Interest-Only Repayments and How They Affect Cashflow

Most investors structure their loan as interest-only for the first few years to minimise repayments and keep the property negatively geared. Paying down principal reduces the amount you can claim as a deduction and turns a negatively geared property into a neutrally or positively geared one, which might sound appealing but actually reduces the tax benefit in the short term.

With an interest-only investment loan, your repayments stay lower and your deductible interest expense stays higher, widening the gap between income and expenses. That gap, as discussed, now carries forward rather than offsetting your salary immediately if you bought after Budget night. Once the interest-only period ends, repayments jump as you start paying down principal, and the deduction shrinks accordingly. This is worth planning for, particularly if you're counting on refinancing or restructuring the loan before the interest-only term expires.

What Counts as a Claimable Expense

Beyond loan interest, you can claim a range of holding costs against your rental income: strata fees, council rates, landlord insurance, property management fees, repairs, and depreciation on fixtures and fittings. For an apartment in Marmion with a body corporate, those strata levies can be significant, particularly in complexes with pools or direct beach access.

These claimable expenses all contribute to the overall loss, and while they don't generate a refund under the new rules if you have no other rental income, they still reduce the taxable profit once the property starts generating positive cashflow or when you calculate your capital gain on sale. Keeping detailed records is important, particularly if you plan to carry losses forward across multiple financial years.

New Builds vs Established Property Under the New Rules

One notable exception in the Budget changes is that new builds retain more favourable treatment. Investors in newly constructed residential property can still choose between the 50% CGT discount or the new inflation-indexed arrangements, whichever works out better, and the negative gearing restrictions don't apply in the same way.

Marmion doesn't see a lot of new apartment stock compared to areas further south, but when new developments do appear near the beach or around Shenton Avenue, they're worth considering if you want to preserve the flexibility that existed before the rule changes. The downside is that new builds often come with a price premium and lower initial rental yields compared to established stock, so the decision depends on your time frame and risk tolerance.

Should You Still Negatively Gear in Marmion?

Negative gearing still works if you're holding property for capital growth and you have the income to cover ongoing losses without needing immediate tax relief. The new rules make it less attractive for single-property investors who relied on offsetting losses against their salary each year, and more suited to those building a portfolio or holding properties long enough to benefit from carried-forward losses against future gains.

If you bought before 12 May 2026, your existing arrangements are largely protected. If you're buying now, the decision hinges on how long you plan to hold, whether you have other rental income to offset losses against, and whether a new build might offer better tax treatment than an established property. It's worth speaking to a tax professional alongside your mortgage broker to model the scenarios specific to your situation, particularly if you're weighing up borrowing capacity and how much you can afford to lose each year while still building wealth over time.

Call one of our team or book an appointment at a time that works for you to discuss how these changes affect your borrowing options and whether an investment loan structure suits your circumstances.

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