Negative gearing, CGT and investor tax: how it works

How do negative gearing and capital gains tax work for property investors, and what is changing?

Negative gearing lets an investor offset a rental loss against other taxable income. Capital gains tax (CGT) is charged on the profit when you sell, and a discount has historically reduced the taxable part of that gain. Our coverage reports that the May Budget restricts both for established investment properties bought after budget night, while new builds keep the existing settings. Rules can shift again, so treat this page as a guide to the mechanisms and check current settings with an accountant.

How does negative gearing work?

An investment is negatively geared when the costs of holding it, mainly interest, rates, insurance and management fees, exceed the rent. That shortfall can be deducted from your other income, which lowers your tax bill. The deduction does not remove the loss. You still carry the cash cost, and the bet is that capital growth outweighs it.

Lenders also treat the deduction as part of your cashflow. In one case we covered, a lender cut an investor’s borrowing power by 36 per cent within a week of the budget announcement, because its serviceability model assumed the deduction would be available. Pre-approvals are conditional, so a policy change during a 30 to 90 day settlement can change what you can borrow.

How does capital gains tax work on an investment property?

CGT applies to the gain between your cost base and the sale price. The gain is added to your taxable income in the year of sale, so your marginal rate matters. Under the old settings, holding for over 12 months earned a 50 per cent discount on the gain. Our coverage reports the replacement for established stock is an inflation-indexation approach, which only credits you for inflation rather than real growth. The difference grows with long holds and strong growth.

Costs count too. Purchase costs, selling costs and capital improvements can lift the cost base and shrink the taxable gain. Keep records for as long as you own the asset, and for years after you sell.

What happens to your cost base if you convert your home to a rental?

When a home becomes an investment, the cost base generally resets to market value on the day it starts producing rent. That figure then decides how much of the eventual gain is taxed. Many owners rely on a bank valuation from a refinance, which tends to be conservative. As we explained, a low valuation on file can mean paying tax on a gap that never existed. An independent agent appraisal or a valuation from a qualified valuer can serve as evidence of market value, so get one at the time of conversion and keep it. The same logic applies if a change in rules makes a valuation date important for splitting a gain.

Can renovating before a valuation date lower your tax?

Sometimes, but not reliably. Valuers price a property from comparable sales, not from your renovation receipts. Our maths on renovating before a CGT valuation date shows the strategy works only when the work adds more value than it costs, the lost rent is manageable, and the work fixes something local buyers penalise. Spend on a property already at the market ceiling and you risk overcapitalising. A tired property in a suburb where most comparable stock is renovated is a better candidate. Always compare the cash cost today with a tax benefit that may not arrive for years.

What other tax deductions can investors claim?

Depreciation is the other large deduction. Capital works covers structure such as walls and fixed cabinetry. Plant and equipment covers removable or mechanical items, usually written off faster. Work done by previous owners can still generate deductions for you if it can be evidenced. Previous owners’ renovations can still be claimable, and a quantity surveyor can estimate costs when records are thin.

State taxes sit alongside federal ones. Victoria’s land tax change for secondary properties is a good example. Our coverage reports it is on track to raise about $4.67bn against an expectation of more than $5.65bn, as of October 2026, as investors sold and the tax base shrank.

What should you check before buying or selling?

  • Whether the property is new or established, because the tax treatment can differ.
  • Your holding period and likely growth, since a discount or indexation matters most on large, long-held gains.
  • Your lender’s serviceability assumptions, not just your own cashflow.
  • Whether you hold a dated independent valuation.
  • Stamp duty and state land tax, which can change the return on their own.

Be cautious with any claim that a tax break alone makes a deal work. A tax advantage on an asset that underperforms is not an advantage.

Key terms

  • Negative gearing: holding a property whose costs exceed its rent, with the loss deducted from other income.
  • Cost base: the amount used to work out your capital gain, including purchase and improvement costs.
  • CGT discount: a reduction in the taxable part of a gain, historically 50 per cent after 12 months.
  • Indexation: adjusting a cost base for inflation instead of discounting the gain.
  • Serviceability: a lender’s test of whether you can afford repayments.
  • Capital works deduction: a depreciation claim on the building’s structure.

Latest coverage on this topic

Rules, rates and figures change. This guide explains how things work; confirm current settings with the relevant regulator, the ATO or a licensed professional before you act.

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General info, not financial advice.