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Understanding negative gearing and capital gains tax in Australia
Negative gearing and capital gains tax (CGT) are two of the most important tax considerations for Australian property investors. Understanding how they work can help you assess the tax implications of owning, managing and eventually selling an investment property.
Negative gearing generally occurs when the deductible costs of an investment exceed the income it generates, while CGT may apply when you sell or dispose of an asset and make a capital gain.
Capital gains tax can apply in a range of situations, from selling an investment property or shares to disposing of business assets or selling a business.
The rules, exemptions and concessions available can vary significantly depending on who owns the asset and the circumstances of the sale.
Understanding your CGT position early can help you plan ahead and manage potential tax liabilities.
Capital gains tax for individuals
Selling an investment property may trigger CGT if the property has increased in value.
The final capital gain can be affected by purchase and sale costs, capital improvements, periods of main residence use and eligibility for the CGT discount.
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Capital gains tax for businesses
Businesses may face CGT when selling or transferring assets such as property, shares, goodwill or business interests.
Eligible small businesses may be able to access CGT concessions that reduce, defer or potentially eliminate a capital gain.
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Capital gains tax for property investors
Selling an investment property may trigger CGT if the property has increased in value.
The final capital gain can be affected by purchase and sale costs, capital improvements, periods of main residence use and eligibility for the CGT discount.
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Capital gains tax for trusts and companies
CGT treatment can differ depending on whether an asset is held personally, through a trust or within a company.
Trusts may be able to distribute capital gains to beneficiaries, while companies generally do not have access to the 50% CGT discount available to individuals and trusts.
Understanding these differences is important when considering ownership structures, asset sales or broader tax planning.
A quick guide to negative gearing and capital gains tax (CGT)
After the Federal Budget on May 12 2026, you’ve probably seen or heard a lot of tax talk on the news or around the office.
If you’re not quite sure what everyone is talking about, or you want to brush up on your terminology before you join the conversation, this negative gearing and capital gains tax guide is for you. Want more information? Try our post-Budget breakdown of the reforms to CGT, negative gearing and discretionary trusts and how it will impact the property market.
What is negative gearing?
Negative gearing occurs when it costs more to ‘hold’ an income-producing asset (like an investment property) than the income it generates.
Gearing refers to the practice of borrowing money to invest in something, and the ‘holding costs’ or cost to ‘hold’ an asset come from the interest on that loan. It is called negative gearing because on paper, holding onto that asset is a net-negative, or generating a loss.
How does negative gearing work?
Contrary to popular belief, negative gearing is not actually a specific tax concession. It is a common way to describe a long-standing practice that uses general tax law principles.
In simple terms, when an investment is negatively geared, some of the holding costs will be tax deductible. Unlike many other jurisdictions, Australia’s income tax laws do not quarantine these losses from other sources of assessable income. Instead, personal income tax is based on your total net income.
For example, income from an investment gets added to income from your salary. If the income from an investment is negative, it gets deducted from the total income instead. And so, because a negatively geared asset is a net loss, it lowers your taxable income.
Why is negative gearing unpopular?
Negative gearing is unpopular because it predominantly benefits higher-income earners. However, this is a structural effect: the benefit of any income tax deductions corresponds to a taxpayer’s marginal tax rate.
Unsurprisingly, the Parliamentary Budget Office estimates 60% of negative gearing deductions are enjoyed by the top 20% of earners
Negative gearing is also grouped with wider issues of inter-generational equity. It is a practice that disproportionately benefits older or wealthier generations, and many believe it makes it more difficult for younger generations to compete for property or accumulate wealth. The concern is that the perceived benefits of negative gearing incentivises capital investment into existing property rather than productive assets, increasing demand on housing supply and driving up prices.
There is also a significant fiscal cost in terms of tax revenue, which is projected to be $7.7bn this FY.
What does it mean to ‘ring-fence’ negative gearing?
In basic terms, ‘ring-fencing’ negative gearing is a way to prevent people using investment losses to reduce taxable income from other sources such as salary or wages.
Investment income is ‘fenced-off’ from other types of income. Any losses from an investment gets carried forward and can only be used to offset taxes on future investment income.
This approach has been used in New Zealand for residential rental properties since 2019.
What does ‘grandfathering’ mean?
‘Grandfathering’ is a transitional mechanism that prevents a new law from applying to arrangements already in place before the law came into effect. It is intended to mitigate the unfairness and economic disruption of applying a law retrospectively.
Not grandfathering legislation can have a cliff-edge effect that results in significant economic disruption. We may see this play out in real-time if Treasury moves forward with its proposal to retrospectively ‘clarify’ the definition of ‘real property’ for the purposes of non-resident CGT.
What does it mean to restrict negative gearing to new builds?
This means that if you are borrowing to invest in a newly-constructed dwelling, you could negatively gear that investment as normal. Presumably, other investments would be ring-fenced, so anyone investing in established housing would not be able to offset any net losses against their taxable income.
The intention is to redirect investor demand and capital allocation from existing properties to new builds which would theoretically increase housing supply.
What is Capital Gains Tax? (CGT)
Introduced to Australia’s tax law in 1985, CGT is a tax on profits — gains — made from a capital asset. This most commonly relates to selling or disposing a capital asset, such as property or shares.
Many people think of CGT as a specific tax that you have to pay when you sell an asset, but the tax is actually just personal income tax. Because the ‘capital gain’ gets added to your total personal income for that financial year, your personal income tax will be higher.
How much is capital gains tax?
Australian tax law differs from other jurisdictions such as the United States in its treatment of CGT.
Because CGT isn’t a discrete tax, it doesn’t actually have a separate CGT rate. Net capital gains are added to a taxpayers’ total income for the year and taxed at the applicable tax rate.
What are the current CGT concessions?
The most significant CGT concession is the 50% CGT discount. This discount is for individuals and trusts, is only available to Australian residents and only applies if you have owned the asset for at least 12 months. There is also a 10% uplift for ‘affordable housing,’ which brings the maximum discount to 60%
There is also a main residence exemption, which essentially means you don’t need to pay CGT if the asset you sold was the home you lived in.
Beyond that, there are a myriad of CGT concessions available to small businesses who meet certain eligibility criteria. These conditions include a maximum of $6m in net assets or $2m in aggregated turnover.
There are also a range of specific carve-outs, exemptions, and rollovers that can provide further relief from CGT.
What is the indexation method for CGT discount?
The indexation method exists as an alternative to the CGT discount and is currently available for assets acquired between 20 September 1985 and 21 September 1999. Rather than discounting a capital gain, you would increase the asset’s cost base by inflation. The indexation factor is the rate you would apply to the cost base and is determined by the consumer price index (CPI). Removal of the CGT discount and reversion to indexation has been floated in the lead up to the 2026-27 Budget. This would effectively reduce the discount available for high-growth assets, where growth has outpaced inflation.
Why is CGT a hot issue for the 2026-27 Federal Budget?
Housing affordability is at political crisis levels, and there are significant fiscal consolidation pressures from structural spending issues. The political risk calculus has shifted markedly since 2019, positioning the Government to introduce potentially significant tax reform. Treasurer Jim Chalmers has indicated that reforms to negative gearing, CGT and trusts are likely to be introduced in the upcoming Federal Budget.
Can tax reform make housing more affordable for first-home buyers?
Tax reform is likely to have only a modest effect on house prices. ANU modelling indicates a 1.5% reduction in house prices, with rents broadly unchanged.
Although 1.5% may be considered significant to some, it is not enough to meaningfully change the current affordability gap.
The difference between the median dwelling price (around $1.2m for combined capital cities) and median household income (just shy of $3k per week for dual-income households) is too wide for an approximate $18,000 (the 1.5% drop) to make a dint.
There are various structural drivers such as supply constraints, demand drivers, credit conditions, etc., that are arguably far more significant. The modelled higher rents are also unlikely to help.
Ideas and insights
Latest insights on CGT
How is CGT calculated?
A net capital gain is broadly calculated as the sum of gross capital gains, minus any current and prior year capital losses, and then further reduced by the CGT discount where applicable.
Working this out can be quite nuanced and is best done with the guidance of a professional tax adviser. However, if you only want a rough idea, you can follow these simple steps:
Start with the total amount received from selling or disposing of the asset.
Deduct base costs. These include the original purchase price, any associated fees, and non-deductible expenditures associated with holding or improving the asset.
If the resulting figure is more than zero, that is your capital gain.
If you owned the asset for more than 12 months, and are otherwise eligible, apply the 50% CGT discount to your capital gain. (60% for ‘affordable housing’ assets.
The final number is your net capital gain, which gets added to your taxable income for that year. In the case of ‘small businesses’, the relevant amount may be further reducible by the small business concessions.
How we can help with property tax and CGT
Property tax can become complex quickly, particularly when you are buying, holding or selling investment property.
RSM's tax advisers can help you understand the tax implications of your property investments and make informed decisions based on your individual circumstances.
We can assist with:
- negative gearing and the deductibility of property expenses
- capital gains tax calculations and planning
- CGT discounts, exemptions and concessions
- tax considerations when buying or selling investment property
- ownership structures for property investments
- main residence and investment property CGT considerations
- property investment losses and carried-forward losses
- understanding how changes to negative gearing rules may affect existing and future investments
- broader personal, family and investment tax planning
Whether you are considering your first investment property, reviewing an existing portfolio or preparing to sell an asset, getting advice early can help you understand your tax position and identify potential issues before making a decision.
Why choose RSM?
Financial decisions rarely involve tax in isolation.
The right approach needs to consider your broader investment objectives, ownership structure, income, succession plans and longer-term financial position.
RSM’s probity specialists understand that every procurement, tender and transaction carries a different level of risk. Rather than applying a one-size-fits-all framework, we tailor our approach to the complexity, sensitivity and governance requirements of each project.
Professional advice can help you understand the potential tax implications of your options and make informed decisions that align with your overall financial goals.
RSM combines specialist tax knowledge with practical commercial advice to help investors navigate complex property and capital gains tax issues.
Our clients benefit from:
- experienced Australian tax advisers with expertise across property and investment tax
- practical advice tailored to your circumstances and investment objectives
- support with complex CGT calculations, concessions and exemptions
- access to specialists across tax, business advisory, superannuation and wealth management
- a national network of advisers supported by local expertise
- advice that considers both your immediate tax obligations and longer-term goals
Need help understanding how negative gearing or capital gains tax applies?
Speak with an RSM tax adviser for tailored advice based on your circumstances.
Whether you're an existing property investor, planning your next purchase or reviewing your investment strategy, our tax advisers can help you understand the implications and make informed decisions with confidence.
Speak with an RSM tax adviser for tailored advice based on your circumstances.
Whether you're an existing property investor, planning your next purchase or reviewing your investment strategy, our tax advisers can help you understand the implications and make informed decisions with confidence.
