What are the Tax Benefits of Negative Gearing?

What Negative Gearing Actually Means

Negative gearing means your rental property costs more to hold than it earns in rent. The difference between your rental income and your deductible expenses, including loan interest, creates a loss that you can offset against your wages from plumbing work. If you earn $95,000 as a plumber and your rental property loses $8,000 for the year, you're taxed on $87,000 instead.

Consider a plumber who buys an investment property with an interest-only loan at the current variable investor rate. Rental income covers roughly 70 per cent of the annual interest bill. Body corporate fees, council rates, insurance, and a property manager push the total holding cost well above what the tenant pays. That shortfall reduces taxable income, which lowers the tax bill in the current financial year.

The full list of claimable expenses includes loan interest, property management fees, council and water rates, landlord insurance, strata or body corporate levies, repairs and maintenance, and depreciation on the building and fixtures. You can't claim your own labour if you do the repairs yourself, but you can claim materials and tools purchased specifically for that rental property. The ATO treats the property as an income-producing asset, so anything genuinely incurred to earn rental income or maintain the property is typically deductible.

How the Rules Change from July 2027

From 1 July 2027, net rental losses on residential properties purchased on or after 7:30pm AEST on 12 May 2026 can only be offset against other residential rental income or carried forward to offset future rental income or capital gains from residential property. You can't deduct those losses against your wage income anymore.

There's a carve-out for eligible new builds. If you buy a dwelling constructed on previously vacant land, or a property where the redevelopment increased the number of dwellings, you can still negatively gear it against your plumbing income under the old rules. A knock-down rebuild that replaces one house with another single house doesn't qualify. If a new build is occupied for more than 12 months before you buy it as an investor, you lose access to negative gearing under the old rules.

Properties you already own or have under contract before 7:30pm on 12 May 2026 are grandfathered. You can keep offsetting losses against your wage income until you sell. Properties bought between that date and 30 June 2027 get a transitional period where negative gearing against wages works until 30 June 2027, then switches to the quarantined model.

Interest-Only Loans and Cash Flow

Interest-only investment loans let you pay only the interest portion each month, with no principal reduction. The loan amount stays unchanged for the interest-only period, which is typically one to five years. After that, the loan converts to principal and interest unless you apply to extend the interest-only term.

Lower monthly repayments mean you can hold a property that wouldn't be affordable on a principal and interest loan. If your monthly interest bill is $2,400 and you're receiving $1,800 in rent, the cash shortfall is $600 a month. On a principal and interest loan at the same rate and loan amount, the monthly repayment might be $3,200, pushing the shortfall to $1,400. That extra $800 a month is the difference between holding the property comfortably or bleeding cash.

The trade-off is you're not building equity through debt reduction. Your only equity gain comes from capital growth. If the property doesn't appreciate or if vacancy rates rise and rental income drops, you're funding the full shortfall from your wage income with no debt reduction to show for it. Lenders also apply a higher interest rate and stricter serviceability tests to interest-only applications, particularly for investors.

Borrowing Capacity and Serviceability Under APRA Settings

Lenders assess your ability to service an investment loan using a buffer of 3 percentage points above the actual product rate. If the variable investor rate is 6.5 per cent, the bank tests whether you can afford repayments at 9.5 per cent. They also apply a debt-to-income cap. From February 2026, lenders can only write up to 20 per cent of their new investor loans at a DTI ratio of 6 times or greater.

Rental income is shaded. Most lenders apply a haircut of 20 per cent to allow for vacancy, management costs, and periods between tenants. If the property rents for $2,000 a month, the bank uses $1,600 in its serviceability calculation. Some lenders shade rental income by as much as 30 per cent, depending on location and property type.

If you're self-employed and lodging tax returns that show negative gearing deductions, your taxable income is lower, which can reduce your borrowing capacity when the bank assesses the next purchase. Some lenders allow you to add back depreciation and other non-cash deductions to your declared income, but not all do. It's worth structuring your tax position with that in mind if you're planning to expand your portfolio within the next 12 months. Tradie Home Loans works with self-employed plumbers regularly and can access lenders that treat add-backs more favourably.

Deposit Requirements and Lenders Mortgage Insurance

Most lenders want a 20 per cent deposit for investment property to avoid Lenders Mortgage Insurance. If you're borrowing more than 80 per cent of the property value, LMI applies, and the premium can run into the tens of thousands depending on the loan amount and loan to value ratio.

You can use equity in your existing home to fund the deposit on an investment property. If your owner-occupied home is worth more than you owe, the lender may let you borrow against that equity without selling. A plumber with a home valued at $650,000 and a remaining mortgage of $300,000 has $350,000 in equity. The lender may allow you to borrow up to 80 per cent of that home's value, which is $520,000, leaving $220,000 in usable equity after paying out the existing loan. That's enough to fund a deposit and settlement costs on a second property without needing to save cash separately.

LMI premiums are capitalised into the loan, so you're paying interest on the premium over the life of the loan. On a loan amount of $450,000 at 85 per cent LVR, the LMI premium might be $12,000 to $15,000. Some lenders offer LMI waivers for certain professions, though plumbers are not always included in those schemes. If you're looking at low deposit loans or want to explore equity release options, it's worth comparing lenders that have different LMI pricing or waiver policies.

Capital Gains Tax and the New Indexation Model

From 1 July 2027, the 50 per cent CGT discount is replaced with cost base indexation and a minimum 30 per cent tax rate on real capital gains for residential investment properties purchased on or after that date. Gains accrued before 1 July 2027 on properties you already own continue under the current 50 per cent discount.

Cost base indexation means your purchase price and certain capital costs are adjusted for inflation using the Consumer Price Index. If you buy a property for $500,000 and sell it years later for $700,000, the taxable gain is calculated on the inflation-adjusted purchase price rather than the nominal figure. The real gain is then taxed at a minimum rate of 30 per cent, regardless of your marginal tax rate.

Eligible new build residential properties get an election. You can choose between the 50 per cent CGT discount and the indexed cost base with the 30 per cent minimum rate, whichever delivers the lower tax. If you're holding a new build investment property long-term in a low-inflation environment, the indexed cost base may be more favourable. If inflation runs high and your marginal tax rate is below 30 per cent, the discount may be more useful. The election is made when you dispose of the asset, so you can run both calculations at the time of sale.

Building a Portfolio Without Overextending

Expanding from one investment property to two or three requires careful attention to your debt servicing position. Each additional property adds to your total debt commitments, and lenders reassess your entire position each time you apply for a new loan. The rental income from your existing properties is shaded, and your taxable income may be lower if you're negatively gearing multiple properties.

In our experience, plumbers with variable income from different jobs or contractors who see seasonal fluctuations benefit from keeping some portion of their borrowing on a variable rate rather than locking everything into a fixed term. A variable rate loan gives you the option to make extra repayments when cash flow is strong, or redraw if you need to cover a vacancy or unplanned repair. Fixed rate loans often restrict extra repayments and charge break fees if you want to exit early.

If you're planning to expand your property portfolio, start with a clear picture of your total debt position, your net rental income after all holding costs, and your capacity to absorb a rate rise or a period without tenants. The DTI cap means lenders are looking at your overall debt level relative to income, not just whether you can service the next loan in isolation. Some plumbers structure their loans so that each property is held in a separate loan account, which makes it clearer when refinancing or selling one property down the line.

When Negative Gearing Still Makes Sense After the Changes

Negative gearing under the new rules still works if you're buying new builds or if you already own properties that are grandfathered. It also works if you have other residential rental income to offset the losses against, or if you're prepared to carry forward the losses and claim them against future rental income or capital gains when you sell.

A plumber buying a newly constructed townhouse on vacant land in a growth suburb can still negatively gear that property against wage income, claim the full suite of deductions including depreciation on the new building and fixtures, and access the CGT election when selling. That's a different proposition to buying an established property where losses are quarantined and the CGT discount is replaced with indexation.

The new rules don't eliminate the tax benefits of investment property, but they do narrow the scenarios where you can offset losses against your plumbing income. If you're buying established property, you need rental income from other properties to absorb the loss, or you need to be comfortable funding the shortfall from after-tax income and banking the loss to offset a future gain. That changes the cash flow equation and makes positively geared or neutrally geared properties more attractive for wage earners without an existing portfolio.

Call one of our team or book an appointment at a time that works for you. We'll run the numbers on your specific situation, compare loan options from lenders across Australia, and make sure the structure fits your income, your portfolio plans, and the new tax settings from July 2027.

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