Negative gearing tax breaks could finally be tightened in the May budget. What options are on the table?

In the lead-up to the May federal budget – now just a fortnight away – Treasurer Jim Chalmers has left the door open to winding back negative gearing, used by around 1.1 million investors for rental properties.

The last serious attempt at reform was during Bill Shorten’s federal election campaign back in 2019. That proposal to curb negative gearing was partly blamed for Labor’s unexpected election defeat.

So, how does the system work now? And what are the pros and cons if the current government does act in the coming budget?

What is negative gearing?

Under Australia’s personal income tax system, investors who borrow to invest in a property can deduct all the related expenses, such as mortgage interest payments, from the rental income. This reduces their rental income, and can often result in a net rental loss.

In Australia, investors can negatively gear by deducting these rental losses from their overall assessable income, including wage and salary income.

The concern is that this tax concession, when combined with a discount on the capital gains tax when the property is sold, gives an advantage to investors and makes it harder for first home buyers to enter the housing market.

Other countries have tougher rules

The ability to negative gear is a generous feature of Australia’s tax system.

A few countries operate similar negative gearing systems, including Canada and Germany. However, the context differs across countries. For instance, in Germany housing finance is more conservative, rent increases are regulated, and tenants have stronger protections, which may reduce the speculative potential of negative gearing.

Most countries apply a more restrictive approach, including the United Kingdom, United States, Ireland and France.

In the UK and New Zealand, rental losses are ring-fenced. This means rental losses are carried forward to offset future rental income, but cannot be used to reduce wages or salary.

In the US, rental losses are classified as “passive activity” losses. So taxpayers can only deduct up to US$25,000 of rental losses against non-passive income.

Who benefits most from negative gearing?

Around half of rental investors – about 1.1 million people – in Australia are negatively geared.

The wealthiest rental investors receive the highest tax benefits from negative gearing. In 2022-23, about 37% of rental deductions went to 500,000 landlords in the top 10% of income earners. Some 71% of rental deductions were claimed by the top 30% of income earners.

In the same year, one in five income earners in the top tax bracket reported rental losses, compared to just 6% of those in lower tax brackets.

People in higher tax brackets also receive greater tax savings from negative gearing. A person in the top bracket would save 45 cents for every extra dollar of rental loss that is offset against a dollar of salary income. Those in the next tax bracket would only save 37 cents in the dollar.

Read more: How many of Australia’s 2.2 million property investors would lose out under a new plan to curb negative gearing?

The case for winding back negative gearing

The key argument is around intergenerational equity.

Given a fixed supply of land, negative gearing gives an advantage to property investors, who can usually outbid first homebuyers. The majority of rental investors already own their own homes. They are on average older and have higher incomes than first homebuyers.

Concerns persist that negative gearing is contributing to the long-run decline in home ownership rates among young people and the widening intergenerational housing wealth gap.

In December 2019, investors and first homebuyers each made up around a quarter of new housing loan commitments.

By December 2025, the share of investor loans had climbed to 40%, while the share of first homebuyer loans fell to 22%. In dollar terms, investors borrowed A$43 billion, while first homebuyers borrowed $19.3 billion.

What negative gearing reforms have been proposed?

In the lead-up to the federal budget next month, there are reports the government could limit negative gearing to one or two properties, or restrict negative gearing to new housing.

Capping the number of homes that can be negatively geared could reduce the number of high-wealth investors, since they can afford to hold large numbers of properties. This could also improve access for homebuyers if investors sell off properties that exceed the limit.

On the other hand, such a reform may distort investment towards more expensive properties, leading to a squeeze in the lower end of the rental market, where affordability is of greatest concern.

Restricting negative gearing to new housing would, in principle, encourage investment in new supply, rather than investors competing with homebuyers for established housing.

In practice, however, the new supply response may be hampered by other factors that affect the viability of new builds, such as construction bottlenecks and rising interest rates. Investors may also “game” the rules by undertaking knockdown-rebuild projects that redefine an established dwelling as a “newly constructed” dwelling.

Could it affect rental prices?

Critics argue scaling back negative gearing would reduce rental supply, leading to rent increases. Research has suggested the rent increases could range from 0.55%, to 2.5%–4.1%.

While these estimates vary, they do not support claims that negative gearing reforms will “supercharge” rents or “cripple” supply.

However, the reality is that many rental investors would be concerned about changes to negative gearing.

Proposals for winding back negative gearing are often accompanied by proposals for reducing the capital gains tax discount, which could lead to larger rent increases.

But the combination of winding back both concessions is estimated to boost the home ownership rate by 4.7%, as investors hold property for shorter periods.

Proposals should therefore be designed to ease concerns around any reduction in rental supply. This includes allowing negative gearing for new housing, not making changes retrospective and ensuring transitional arrangements for any reforms.

Why reform now looks likely

Ongoing housing affordability concerns have frustrated younger voters, whose share of the voting population has increased to about half of the electorate. Public support for winding back these concessions for investors has grown.

Facing rising budget costs and growing intergenerational inequality, the time is now ripe for reforms to wind back tax concessions on rental investment properties.