Beginner's Guide to Negative Gearing

Negative gearing allows you to deduct the losses from your rental property against your other taxable income, including your salary.

The strategy works when your rental income falls short of your total ownership costs, including loan interest, property management fees, council rates, insurance and repairs. You claim the shortfall as a tax deduction, reducing your overall tax payable. The longer-term objective is to offset those annual losses with capital growth when you eventually sell the property.

Grandfathering and the New Build Exemption

Properties held at 7:30pm on 12 May 2026, including those under contract awaiting settlement at that time, retain full negative gearing deductions against all income until sold. Properties classified as eligible new builds acquired after that date also retain full deductions.

From the 2027-28 income year, losses on established properties acquired after 12 May 2026 can only be offset against income from other residential properties, including capital gains on residential property sales. Excess losses carry forward to future years. Properties acquired between 12 May 2026 and 30 June 2027 may be negatively geared under the current rules until 30 June 2027 only.

An eligible new build includes a dwelling constructed on previously vacant land or a dwelling that replaces an existing property where the total number of dwellings increases. A knock-down rebuild that results in the same number of dwellings does not qualify. A new build that has been occupied for more than 12 months before being sold to a subsequent investor loses access to negative gearing for that purchaser.

What This Means for Doncaster East Buyers Today

Doncaster East includes a mix of established housing stock near Tunstall Square and newer townhouse developments closer to Blackburn Road and Springvale Road. An investor purchasing an established home in one of the leafy pockets near Mullum Mullum Creek after 12 May 2026 will need to ensure they can cover any rental shortfall from residential property income alone, or accept that excess losses will accumulate and roll forward.

Consider a buyer who acquires an older property on a larger block with the intent to hold it for several years before redevelopment. Under the new rules, if rental income does not cover holding costs, the annual losses can be offset only against other residential property income. If the investor also owns a positively geared property elsewhere, the losses can be offset against that rental income. Otherwise, losses accumulate and become deductible when the property is sold and a capital gain is realised.

How Interest Only Loans Interact with Negative Gearing

An interest only loan structure increases your annual interest deduction because you are not reducing the principal balance during the interest only period. This increases the size of your annual tax deduction and can improve your after-tax cash flow, particularly in the early years when rental yields may be lower.

Interest only periods are typically approved for five years on investment loans, with the option to reapply for an extension depending on the lender and your financial position at the time. Once the interest only period expires, the loan reverts to principal and interest repayments, which increases your monthly repayment amount and reduces your claimable interest expense over time.

Under APRA's prudential framework, lenders apply higher risk weightings to interest only investment loans, particularly where the loan to value ratio exceeds 80 per cent. This translates into higher scrutiny during serviceability assessments and, in some cases, a marginally higher interest rate compared to principal and interest structures.

Serviceability and Debt-to-Income Limits

Lenders assess your ability to service an investment loan at an interest rate at least 3 percentage points above the loan product rate. Rental income is included in the assessment, but most lenders apply a discount of around 20 per cent to account for vacancy periods, property management fees and maintenance costs.

From 1 February 2026, lenders must ensure that no more than 20 per cent of new investor loans in any quarter are advanced to borrowers with a total debt-to-income ratio of six times or greater. This applies across all your debt, including owner-occupied home loans, personal loans and credit cards. The limit affects high-income earners who are looking to expand their property portfolios and may require you to reduce other debt or increase your deposit to remain within the threshold.

For investors based in Doncaster East who already own a principal place of residence and are considering a second or third property, borrowing capacity becomes the primary constraint rather than deposit size alone.

Capital Gains Tax Treatment from 1 July 2027

From 1 July 2027, gains accruing on affected assets after that date are taxed under a cost base indexation model. You index the purchase price and associated acquisition costs in line with inflation and pay tax only on above-inflation gains. A 30 per cent minimum tax rate applies to the real gain for most taxpayers, with exemptions for recipients of certain government payments.

For properties purchased before 1 July 2027 and sold after that date, gains are apportioned. The portion accruing before 1 July 2027 is taxed under the existing 50 per cent capital gains discount. The portion accruing after that date is taxed under the new indexation and minimum rate rules. You can either obtain a market valuation as at 1 July 2027 or apply an apportionment formula published by the ATO.

Investors who purchase eligible new builds after 12 May 2026 can choose at the time of sale whether to apply the existing 50 per cent discount or the new indexation and minimum rate treatment, depending on which produces the lower tax outcome.

Vacancy Costs and Claimable Expenses

You can claim interest, council rates, insurance, property management fees, repairs, and depreciation on the building and plant and equipment for the period the property is rented or genuinely available for rent. If the property is vacant and not actively marketed for lease, you cannot claim holding costs for that period.

Doncaster East vacancy rates are influenced by proximity to Deakin University's Burwood campus, the Eastern Freeway, and the Doncaster Park and Ride. Properties within walking distance of bus routes along Blackburn Road and Doncaster Road tend to experience shorter vacancy periods, particularly among renters commuting to the CBD or studying locally.

Property management fees typically range from 6 to 8 per cent of the monthly rent plus GST, depending on the agent and the level of service. These fees are fully deductible. Body corporate fees for townhouses and units are also deductible, along with special levies for building repairs, provided they relate to maintenance rather than capital improvements.

Refinancing to Access Equity for a Second Property

Once your existing property has increased in value, you can refinance to release equity and use it as a deposit for a second investment property. Lenders typically allow you to borrow up to 80 per cent of the property's current value without incurring lenders mortgage insurance, or up to 90 per cent with LMI, depending on your circumstances.

Interest on borrowings used to acquire the second property is deductible. Interest on borrowings used for private purposes, such as renovating your own home or paying off personal debt, is not deductible even if the loan is secured against an investment property.

In our experience, investors who acquire multiple properties over time often structure their loans to keep the debt against each property separate. This makes it clearer which interest expense relates to which property and avoids complications if one property is sold while others are retained.

Call one of our team or book an appointment at a time that works for you. We can review your current position, model the tax treatment under the new rules, and help you access investment loan options from banks and lenders across Australia.

Frequently Asked Questions