Most people who buy one investment property end up buying more. That's not coincidence. Once you understand how the tax treatment works and how to read a rental yield, the logic of holding property tends to compound. This post explains the mechanics so you can assess whether they fit your situation.
How the Tax Side Works
When an investment property costs more to hold than it earns in rent, the property is said to be negatively geared. A property is negatively geared when the deductible costs of owning it, mortgage interest, council rates, insurance, and maintenance, add up to more than the rental income it generates. The resulting loss can generally be offset against other taxable income, such as salary, business income, or other investments, subject to ATO rules.
The size of the tax benefit scales with your income. The higher your marginal rate, the more each dollar of rental loss saves you. For someone earning $120,000, a $15,000 rental loss reduces the after-tax cost of that loss to approximately $10,200 for the year.
Depreciation is a separate tool many investors underuse. A property can be tax-negative but cash-positive, this happens when depreciation, a non-cash deduction, pushes total expenses above rent, but you're not actually out of pocket. A quantity surveyor can produce a depreciation schedule; the rules differ between new builds and established properties, so check current ATO guidance.
Important: The rules are changing. The 2026-27 Federal Budget, announced 12 May 2026, has proposed significant reforms. Per the ATO (ato.gov.au), the Government proposes to limit negative gearing for residential property to new builds, and to replace the 50% CGT discount with an inflation-based discount and a 30% minimum tax on gains from 1 July 2027. The impact of these changes on existing investments will be limited. Properties held at the Budget announcement (7:30pm AEST 12 May 2026) will be exempt from the negative gearing changes, while the CGT reforms will only apply to gains that accrue after 1 July 2027. Investors in new builds will be able to choose the 50% CGT discount or the new arrangements. These are announced reforms; the legislation has not yet been enacted. Treat them as proposed changes and discuss them with a licensed adviser or registered tax agent before acting.
For CGT under the current law: there is a CGT discount of 50% for Australian resident individuals who own an asset for 12 months or more, meaning you pay tax on only half the net capital gain. That gain is then added to your taxable income and taxed at your marginal rate. Good record-keeping matters: keeping adequate records of all expenditure will help you correctly work out the amount of capital gain or capital loss you have made when a CGT event happens. You must keep records relating to your ownership and all the costs of acquiring and disposing of property.
What the Rental Income Picture Looks Like
Rental yield is annual rent expressed as a percentage of the property's purchase price. Gross yield is the headline number; net yield subtracts ongoing costs like management fees, insurance, rates, and maintenance. Net yield is the figure that matters for cashflow planning.
As of September 2025, the national average gross rental yield sits between 3.7% and 5.0%. The spread is wide by location and property type. Units and apartments consistently outperform houses by 1-2 percentage points across all markets. Regional markets consistently deliver higher yields than metropolitan areas, with some regional Western Australian and Northern Territory markets achieving yields above 6% for houses and up to 8% for apartment investments.
Vacancy is the other side of the equation. Vacancy rates in Australia for all dwellings average 1.7%. Low housing stock is contributing to tighter vacancy rates, with national rental listings 11% lower than at the same time last year. These figures can shift quickly, particularly in markets driven by mining, seasonal work, or university populations. Always get an independent rental appraisal for any property you are considering, and understand what drives demand in that specific area.
The Trade-offs to Weigh
Negative gearing is a cashflow commitment, not a profit strategy in its own right. The tax benefit reduces your out-of-pocket shortfall; it does not eliminate it. For rental properties, periods without a tenant mean zero rental income, while expenses continue to accrue. This exacerbates the negative cashflow, putting additional strain on the investor's finances.
Interest rate movements are significant. A higher rate environment stretches the cashflow gap between rent received and interest paid. Your ability to service the loan without relying solely on the tax offset matters to any lender assessing your application.
The legislative environment is also a genuine consideration. Tax laws can change. The government could alter the rules around negative gearing or capital gains tax, impacting the viability of an investment strategy. The 2026 Budget proposals are a live example of this. The transition rules around grandfathering and new builds are complex; a registered tax agent or licensed financial adviser can map out how the proposed changes would apply to your specific circumstances.
Ownership structure matters too. Buying in your own name, a spouse's name, a company, a trust, or a self-managed super fund all carry different tax, cashflow, and exit implications. This is not a decision to make at the contract stage.
A Worked Example
The following is illustrative only and does not constitute a return projection.
Consider a new-build property purchased for $650,000. Assume a loan of $520,000 at a rate applicable at the time of purchase (confirm current rates with a licensed broker).
- Annual rent received: $28,600 (roughly $550 per week, a figure consistent with mid-range market rents; get an independent appraisal for any actual property)
- Annual interest cost: approximately $36,400 (at a notional 7% for illustration purposes)
- Other holding costs (rates, insurance, management, maintenance): approximately $7,000
- Total costs: approximately $43,400
- Net rental loss before depreciation: approximately $14,800
- Depreciation (new build, illustrative): approximately $8,000
- Total tax-deductible loss: approximately $22,800
For a PAYG employee on a marginal rate of 39% (including Medicare), that loss represents a tax saving of approximately $8,900 for the year, or roughly $171 per week. The actual out-of-pocket cost after the tax benefit reduces meaningfully from the raw cashflow shortfall.
Because this is a new build, under both the current rules and the proposed post-2027 framework, the property retains full negative gearing treatment. On sale after more than 12 months, the CGT discount would apply to gains accrued before 1 July 2027 under the current law; gains accruing after that date would be subject to the proposed new rules if they are enacted. A tax adviser can model both scenarios.
This example uses rounded, illustrative figures. Run your own numbers with a broker and a tax adviser before committing.
What to Do Next
If you are seriously considering your first investment property, three practical steps will get you off the starting block:
Get a borrowing capacity assessment. A licensed mortgage broker can assess what you can borrow today, how that sits against your existing commitments, and what structure makes sense for your circumstances. This step costs nothing and gives you a real number to plan around.
Speak with a registered tax agent or licensed financial adviser. The interaction between negative gearing, depreciation, CGT, and the proposed 2027 reforms is not simple. A professional who understands investment property tax can map out how the rules apply to you, including the ownership structure question.
Understand what you are buying before you buy it. Location, property type, vacancy risk, rental appraisal, and build quality all shape how the investment actually performs. At EWC, we source investment properties and coordinate the property and finance process for our clients. You can read more about how that works on our services page or book a call to talk through your situation.
The first property tends to teach you the most. People who take it seriously from the outset, the tax, the cashflow, the structure, the location, tend to find the second one a far more deliberate decision.
General information only, not personal financial advice. Speak with a licensed adviser before acting.