Top Strategies to Maximise Negative Gearing Returns

What Negative Gearing Actually Means for Woollahra Investors

Negative gearing lets you deduct the shortfall between your rental income and holding costs against your other income, including salary or business earnings. The interest on your investment loan is typically the largest deductible expense, followed by council rates, insurance, property management fees and depreciation.

Consider a self-employed consultant in Woollahra who purchases a unit in Bondi Junction at the current median of around $900,000 to $1,000,000. With an 80 per cent loan at current variable rates, the annual interest bill might sit around $60,000 to $65,000. Add another $8,000 to $10,000 in holding costs. If the property generates $40,000 in rent, the annual loss is roughly $28,000 to $35,000. That loss is deductible against the consultant's assessable income, reducing tax payable in that financial year.

The benefit hinges on your marginal tax rate. If you're paying tax at 45 cents in the dollar, a $30,000 loss saves you $13,500 in tax. If you're at 32.5 cents, the saving is $9,750. Negative gearing works hardest for high-income earners who can absorb the cash flow gap and wait for capital growth to deliver the return.

How the Rules Changed from May 2026

Properties you owned or had under contract at 7:30pm AEST on 12 May 2026 continue under the old rules. Losses from these properties remain fully deductible against all income until you sell. New builds purchased after that date also retain full negative gearing treatment.

For established properties acquired after 12 May 2026, the treatment shifts from the 2027-28 income year. Losses on those properties can only be offset against income from other residential properties, including capital gains when you eventually sell. Excess losses carry forward to future years and can be used against residential property income or gains down the track.

If you're considering expanding your property investment portfolio, the timing of your purchase and the type of dwelling you buy now determine which rules apply. A working professional buying a Paddington terrace in late 2026 will be subject to the new quarantining provisions from mid-2027, while someone who settled on a Rose Bay apartment in April 2026 keeps the old treatment indefinitely.

Interest-Only Loans and Cash Flow Management

Interest-only repayments are the default structure for most negatively geared investors because they maximise the deductible expense and minimise cash outflow during the holding period.

On a principal-and-interest loan, only the interest component is deductible. The principal repayment builds equity but delivers no tax benefit and increases your monthly cost. On an $800,000 loan at current rates, switching from interest-only to principal-and-interest might add $1,500 to $2,000 per month to your repayment, none of which is claimable.

Most lenders offer interest-only periods of one to five years on investment loan products. At the end of that term, the loan typically reverts to principal-and-interest unless you request an extension or refinance to another interest-only product. If you're self-employed, lenders will reassess your income and serviceability at each renewal, so keeping your financials current is part of the ongoing cost of holding the structure.

Rushcutters Bay units, with gross yields around 4.76 per cent, are among the few properties in the eastern suburbs where an interest-only loan might come close to break-even after tax. A $950,000 unit generating $650 per week in rent produces $33,800 annually. Interest at current rates might be $50,000, plus $6,000 in other costs. The pre-tax loss is $22,200, but if you're on the top marginal rate, the after-tax cost drops to around $12,200 per year, or roughly $235 per week.

Loan to Value Ratio and Borrowing Capacity Under Current Serviceability Rules

Lenders assess your ability to service an investment loan at a rate 3.0 percentage points above the actual loan rate. If the product rate is 6.5 per cent, you'll be assessed at 9.5 per cent. That buffer has been in place since late 2021 and significantly reduces the loan amount most borrowers can access.

From February 2026, lenders also apply a debt-to-income cap. No more than 20 per cent of new investor loans can go to borrowers with total debt six times their gross income or higher. If your household income is $200,000, total borrowings above $1.2 million put you into the restricted portion of the lending pool. Many lenders apply their own overlays below the regulatory cap, particularly for self-employed applicants.

If you're buying at an LVR above 80 per cent, you'll pay Lenders Mortgage Insurance. The premium is calculated on a sliding scale and added to your loan or paid upfront. On a 90 per cent LVR loan of $900,000, LMI might cost $25,000 to $35,000 depending on the lender and your employment type. Self-employed borrowers often face higher premiums or lower maximum LVRs than PAYG borrowers, even with identical income.

Some lenders offer LMI waivers for borrowers in certain professions or with larger deposit sources, but those are less common on investment loans than on owner-occupier purchases.

What You Can Claim Beyond Interest

Interest is the largest deduction, but it's not the only one. Council rates, water rates, strata levies, landlord insurance, property management fees, repairs and maintenance are all deductible for the period the property is rented or genuinely available for rent.

Depreciation on the building and fixtures can be claimed if the property was built after 1985 for capital works or if plant and equipment items were purchased new by you. A quantity surveyor's depreciation schedule costs around $600 to $800 and typically uncovers $5,000 to $15,000 in deductions per year on newer units, reducing further as the assets age.

Borrowing costs, including loan establishment fees, valuation fees and mortgage broker fees, are deductible over five years or the life of the loan if shorter. Stamp duty and conveyancing costs are not immediately deductible but form part of your cost base when calculating capital gains tax on sale.

If you use a portion of your loan to fund renovations or improvements, the interest on that portion remains deductible as long as the work is done before the property is first rented and the funds are drawn from an investment loan facility. Mixing private and investment purposes in the one loan account muddies deductibility, so keep the borrowing quarantined where possible.

Capital Gains Tax Treatment from July 2027

For residential investment properties, capital gains accruing before 1 July 2027 continue to receive the 50 per cent CGT discount if you're an individual, trust or partnership and you've held the asset for more than 12 months. Gains accruing from 1 July 2027 onward are taxed under a new system that indexes your cost base to inflation and applies a 30 per cent minimum tax rate to real gains.

If you bought a Woollahra terrace in 2024 for $4,900,000 and sell it in 2030, you'll split the gain into a pre-July 2027 portion and a post-July 2027 portion. The pre-2027 gain gets the 50 per cent discount. The post-2027 gain is indexed for CPI, and you pay tax on the inflation-adjusted profit at your marginal rate or 30 per cent, whichever is higher. You can obtain a market valuation as at 1 July 2027 or use the ATO's apportionment method.

For eligible new builds purchased after 12 May 2026, you can choose at the time of sale whether to use the old 50 per cent discount or the new indexed treatment. That choice gives you flexibility to optimise based on your marginal rate and the inflation outcome over the holding period.

If you're receiving the Age Pension, Disability Support Pension or JobSeeker in the year you sell, you're exempt from the 30 per cent minimum rate on the indexed portion.

When Refinancing Makes Sense

If your current loan rate sits above the sharper pricing available in the market, refinancing your investment loan can reduce your interest cost and improve cash flow without changing your deduction position. Moving from a 7.0 per cent rate to a 6.3 per cent rate on an $800,000 loan saves around $5,600 per year in interest.

Refinancing also lets you access equity if your property has grown in value and you want to fund a second purchase using a debt recycling strategy or equity release. Lenders will reassess your income and serviceability under current rules, including the 3.0 percentage point buffer and the DTI cap, so your borrowing capacity may be lower than when you first bought, even if your income has increased.

If you're self-employed, bring two full years of tax returns, recent BAS statements and year-to-date profit and loss if you're refinancing mid-year. Lenders treat self-employed income more conservatively than PAYG, often applying a discount or requiring longer trading history, particularly if your income fluctuates.

Call one of our team or book an appointment at a time that works for you. We'll review your current loan structure, run serviceability under current lender policies, and identify the refinance options that fit your tax position and cash flow.

Fixed Rate, Variable Rate or a Split

Most investors choose variable rates because they offer offset accounts and flexibility to make extra repayments or refinance without break costs. Offset accounts don't reduce the loan balance for tax purposes, but they reduce the interest you pay, which lowers your deductible expense and your out-of-pocket cost.

Fixed rates lock in your repayment and your deductible interest for the fixed period, usually one to five years. If rates fall during that period, you'll pay a break cost to exit early. If rates rise, you're protected. Fixed loans generally don't allow offset accounts, and extra repayments are capped, so you lose flexibility.

A split loan gives you part fixed, part variable. You get certainty on a portion of the debt and flexibility on the rest. The variable portion can sit in an offset-enabled account, and you can refinance or restructure that portion without triggering break costs on the fixed side.

In our experience, working professionals with stable salary income tend toward splits, while self-employed borrowers with variable income prefer full variable structures to retain maximum control over cash flow and offset balances.

Frequently Asked Questions