Positive vs Negative Gearing Explained
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Property investment has long been one of Australia's most popular wealth-building strategies. For decades, investors have used both positive gearing and negative gearing to grow their property portfolios, improve cash flow, and minimise tax.
However, the 2026 Federal Budget has introduced proposed changes that could significantly alter how future investors approach property investment.
So what exactly are positive and negative gearing, and how might the new rules affect your investment strategy?
Let's break it down.
What Is Gearing?
Gearing refers to borrowing money to purchase an investment asset, such as an investment property.
Whether a property is positively or negatively geared depends on the relationship between the property's rental income and its expenses.
Property expenses typically include:
Mortgage interest
Council rates
Water rates
Owners Corporation fees
Landlord insurance
Property management fees
Maintenance and repairs
What Is Positive Gearing?
A property is positively geared when the rental income exceeds the property's expenses.
Example
Item | Annual Amount |
Rental Income | $35,000 |
Expenses | $30,000 |
Net Profit | +$5,000 |
In this example, the investor receives an additional $5,000 per year before tax.
Advantages of Positive Gearing
✅ Positive cash flow from day one
✅ Additional income to help cover living expenses
✅ Lower financial stress during interest rate rises
✅ Easier to hold long-term
✅ Less reliance on tax benefits
Disadvantages of Positive Gearing
❌ Rental profits are taxable
❌ High-yield properties may experience slower capital growth
❌ Fewer opportunities in premium inner-city locations
Positive gearing is often favoured by investors seeking reliable income, retirees, and those looking for stronger borrowing capacity.
What Is Negative Gearing?
A property is negatively geared when the rental income is less than the property's expenses.
Example
Item | Annual Amount |
Rental Income | $30,000 |
Expenses | $40,000 |
Net Loss | -$10,000 |
Historically, Australian investors have been able to deduct this $10,000 loss from their taxable income, reducing their tax liability.
Advantages of Negative Gearing
✅ Potential tax benefits
✅ Access to higher-growth property markets
✅ Opportunity to build wealth through capital growth
✅ Popular among higher-income earners
Disadvantages of Negative Gearing
❌ Ongoing out-of-pocket costs
❌ Greater exposure to interest rate increases
❌ Requires strong financial buffers
❌ Investment performance relies heavily on future capital growth
Many investors have traditionally accepted short-term cash flow losses in exchange for long-term property appreciation.
Positive vs Negative Gearing: A Quick Comparison
Feature | Positive Gearing | Negative Gearing |
Cash Flow | Positive | Negative |
Rental Income vs Expenses | Income > Expenses | Income < Expenses |
Tax Outcome | Pay tax on profit | Potential tax deductions |
Risk Level | Lower | Higher |
Typical Goal | Income | Capital Growth |
Best Suited For | Conservative investors | Growth-focused investors |
The 2026 Federal Budget Changes
One of the most significant announcements in the 2026 Federal Budget was the proposed reform of negative gearing rules.
Under the proposal, from 1 July 2027, investors purchasing established residential properties after Budget night may no longer be able to offset rental losses against their salary or other personal income.
Instead, those losses would generally be quarantined and carried forward to offset future residential property income or capital gains.
Importantly, investors who already own investment properties before the commencement date are expected to be grandfathered under the existing rules.
The Government's stated objective is to improve housing affordability while encouraging investment in newly built housing.
How the Changes Impact Positive Gearing
Positive gearing is largely unaffected by the proposed reforms.
Because positively geared properties already generate income rather than losses, investors are not relying on negative gearing tax deductions.
For positively geared investors:
✅ Rental income remains unchanged
✅ Tax treatment remains largely unchanged
✅ Cash flow remains strong
✅ Investment decisions become less dependent on government tax incentives
As a result, high-yield investment properties may become increasingly attractive.
Investors may shift their focus towards:
Regional growth areas
Dual-income properties
House and land packages
NDIS and SDA housing
Properties with strong rental demand and low vacancy rates
How the Changes Impact Negative Gearing
The proposed reforms could significantly affect future negatively geared investments.
Before the Changes
An investor earning $120,000 annually who incurred a $10,000 rental loss could reduce their taxable income to $110,000.
This would often generate a meaningful tax refund.
After the Changes
The same investor would continue to pay tax on the full $120,000 salary.
The $10,000 rental loss could no longer be immediately claimed against employment income and would instead be carried forward.
This means:
❌ Lower immediate tax benefits
❌ Reduced after-tax returns
❌ Greater importance placed on cash flow
❌ Increased holding costs
Future investors may need to be far more selective when purchasing negatively geared properties.
What Could Happen to the Melbourne Property Market?
Established Apartments
Investor-heavy markets such as Melbourne CBD, Docklands, Southbank and parts of North Melbourne may experience reduced investor demand.
Historically, many investors accepted lower rental yields because tax benefits and capital growth compensated for the shortfall.
Without those tax advantages, some investors may reassess these assets.
New Developments
Newly constructed properties are expected to remain eligible for negative gearing benefits under the proposed framework.
As a result, we may see increased demand for:
Off-the-plan apartments
New townhouses
House and land packages
Build-to-rent developments
This could provide additional support for Melbourne's new housing supply pipeline.
What Does This Mean for First Home Buyers?
Many first home buyers may view these changes positively.
Potential benefits include:
✅ Reduced competition from investors
✅ Improved affordability in some markets
✅ More opportunities to purchase established homes
However, the overall impact will depend on broader market conditions including supply, population growth, interest rates, and economic performance.
The Future of Property Investing
For many years, some investors focused heavily on tax benefits when selecting investment properties.
The proposed changes may encourage a different mindset.
Instead of asking:
"How much tax can I save?"
Investors may increasingly ask:
"How much income does this property generate?"
"How strong is tenant demand?"
"What are the long-term growth fundamentals?"
"Can this property perform without tax incentives?"
These questions often lead to stronger investment decisions regardless of government policy.
Positive gearing and negative gearing have both played important roles in Australian property investment.
While negative gearing has traditionally offered valuable tax advantages, the proposed 2026 Budget reforms may significantly reduce its appeal for future purchases of established residential property.
As a result, cash flow, rental yield, and property fundamentals are likely to become more important than ever.
Whether you are a first-home buyer, seasoned investor, or someone considering your first investment property, understanding how these changes may affect your strategy is essential before making your next move.
Disclaimer
The information provided in this article is general information only and does not constitute financial, taxation, legal, or investment advice. While every effort has been made to ensure the information is accurate at the time of publication, property laws, taxation policies, government regulations, and market conditions may change without notice.
The proposed negative gearing reforms discussed in this article are subject to legislation and may be amended before implementation. Readers should seek independent advice from qualified financial advisers, accountants, mortgage brokers, or legal professionals before making any investment or property-related decisions.
Core Elite Real Estate and its representatives accept no responsibility for any loss or damage arising from reliance on the information contained in this article.
