The political noise around negative gearing has been building for years, and it’s finally looking like changes will come through in some form. Whether it’s limiting negative gearing to new builds, capping the deduction, or phasing it out entirely depends on which party wins the next election and what compromises they make.

But investors need to plan now, not after legislation passes. Here’s how the math changes under various reform scenarios, and what it means for your investment property strategy.

What Negative Gearing Actually Is

First, the basics, because this gets misunderstood constantly.

Negative gearing means your property costs more to hold (mortgage interest, rates, maintenance, management fees) than it generates in rent. That loss can be deducted against your other income, reducing your tax bill.

Example: You earn $120k salary, your investment property loses $15k/year. You can claim that $15k loss against your salary, reducing your taxable income to $105k. At a 37% marginal tax rate, that saves you about $5,500 in tax.

The property’s negatively geared, but you’re banking on capital growth to exceed your annual losses over time. You lose money each year but make it back (and then some) when you eventually sell.

This strategy only makes sense in high-capital-growth markets. If the property doesn’t grow significantly in value, you’re just lighting money on fire each year.

The Proposed Reform Scenarios

Option 1: Limit negative gearing to new builds only

Existing properties can’t be negatively geared - you can still deduct expenses against rental income, but losses can’t offset other income. New builds keep full negative gearing benefits.

This was Labor’s 2019 policy. It’s designed to push investors toward funding new housing construction rather than competing with owner-occupiers for existing stock.

Option 2: Cap the deduction

You can still negatively gear, but losses are capped at say $10k or $20k per year. Anything beyond that cap can’t be claimed against other income.

Option 3: Phase it out entirely

No negative gearing for anyone, existing or new properties. Full stop.

Option 1 looks most politically viable. Option 3 is too drastic and would probably tank the property market, which no government wants to be responsible for.

How the Math Changes: Scenario Analysis

Let’s run numbers on a typical Sydney investment property.

Property details:

• Purchase price: $900k
• Loan: $720k (80% LVR)
• Interest rate: 6.5%
• Annual interest: $46,800
• Rental income: $38,000/year
• Other costs (rates, insurance, management): $8,000/year
• Total annual loss: $16,800

Under current rules:

Annual loss: $16,800 Tax saving (37% marginal rate): $6,216 Net annual loss: $10,584

You’re $10.6k out of pocket each year, betting on capital growth to make it worthwhile.

If the property grows 4% annually, that’s $36k/year growth. Minus your $10.6k annual loss, you’re ahead by $25.4k/year (on paper - unrealised until you sell).

Under Option 1 reform (existing properties can’t be negatively geared):

Annual loss: $16,800 Tax saving: $0 (loss can’t offset other income) Net annual loss: $16,800

You’re now $16.8k out of pocket annually. The same 4% growth ($36k) minus $16.8k loss leaves you $19.2k/year ahead.

Still profitable if capital growth continues, but significantly less attractive. Your annual cash flow loss increased 59%.

Under Option 2 reform ($10k deduction cap):

Annual loss: $16,800 Deductible portion: $10,000 Tax saving (37% rate): $3,700 Net annual loss: $13,100

You’re $13.1k out of pocket. Better than losing the deduction entirely, but worse than current rules.

What This Means for Different Investor Types

High-income earners (marginal tax rate 45%+):

Negative gearing is most beneficial at high tax rates. These investors lose the most under reform. A $16.8k annual loss currently saves them $7,560 in tax. Under Option 1, they save nothing.

For high earners, the investment case for negatively geared property weakens significantly. They’ll either shift to positive-geared properties (which yield better), commercial property (different tax treatment), or other asset classes entirely.

Mid-income investors ($90k-$150k, 37% tax rate):

Still lose benefit, but it was less valuable to begin with. The shift to focusing on yield over capital growth probably makes sense anyway.

First-time investors:

If you haven’t bought yet and reform passes limiting negative gearing to new builds, you’re looking at new apartments or house-and-land packages in growth corridors.

The problem: New apartments have oversupply issues in most markets. Capital growth has been weak. And you’re buying at retail prices (developer margins built in) rather than potentially getting a deal on an established property.

House-and-land in outer suburbs can work, but you’re betting on those areas developing and growing. That’s a longer-term play with more uncertainty.

The Positive Gearing Alternative

If negative gearing loses its tax advantage, the focus shifts to positive-geared properties - ones that generate more rent than they cost to hold.

This usually means:

• Higher-yield areas (regional towns, outer suburbs)
• Cheaper properties (lower mortgage costs relative to rent)
• Properties with renovation potential (force equity growth)

A $450k unit in Newcastle renting for $450/week might be positively geared. It won’t grow as fast as a Sydney property, but it pays for itself while you hold it.

The challenge is finding positive-geared properties in markets with genuine growth prospects. High yield often correlates with limited capital growth (and vice versa).

What Smart Investors Are Doing Now

1. Selling underperforming properties before reform hits

If you’ve got a negatively geared property with weak growth prospects, the tax benefit is the only thing making it viable. Once that disappears, it’s just a money pit. Better to sell now while buyers aren’t yet factoring in reform.

2. Shifting to commercial property

Different tax treatment, different market dynamics. Commercial leases are longer and more stable. Yields are higher. But it requires more capital and expertise.

3. Buying new builds while negative gearing still applies

If Option 1 passes (negative gearing only for new builds), buying new now locks in that benefit even for future years. Though you’re gambling the reform will actually be implemented that way.

4. Focusing on strong capital growth markets regardless

If the property’s growing 7-10% annually, you can handle higher holding costs even without tax deductions. The challenge is identifying those markets reliably.

Some investors I’ve talked to have actually started using AI strategy support to model different reform scenarios and stress-test their portfolios under various tax and growth assumptions. The level of scenario analysis you can do now is pretty sophisticated compared to the basic spreadsheets people used to rely on.

The Broader Market Impact

If negative gearing is meaningfully reformed, investor demand for established properties will drop. That puts downward pressure on prices, particularly in the price ranges where investors compete with owner-occupiers ($600k-$1.5m in Sydney).

First home buyers benefit from reduced competition. That’s the intended policy outcome.

But landlords exiting the market reduces rental supply, which could push rents higher. That’s the unintended consequence everyone’s worried about.

The actual market impact depends on:

• How many investors sell vs hold
• How quickly the changes are implemented (grandfathering existing properties vs immediate application)
• What other policy settings change simultaneously (first home buyer incentives, zoning reforms, etc.)

Should You Buy Investment Property Now?

Depends entirely on your situation.

If you’re buying purely for negative gearing tax benefits, I’d hold off. The policy uncertainty is too high, and if reform passes, you’ve bought at pre-reform prices but hold under post-reform tax treatment. That’s the worst combination.

If you’re buying for genuine long-term capital growth in a strong market, and the property can eventually become positively geared (through rent increases or loan paydown), then policy changes are less relevant. You’re holding for 10+ years anyway.

If you’re buying for yield and cash flow, this policy debate is largely irrelevant to your strategy. Positive-geared properties don’t rely on negative gearing.

What I’d Actually Do

Full disclosure: I haven’t owned investment property for three years. I sold in 2023 because the math didn’t work anymore at prevailing interest rates and Sydney price levels.

If I were buying now, I’d focus on:

• Positive gearing or neutral gearing from day one
• Markets with population growth and limited supply
• Properties where I could add value through renovation
• Smaller cities where yields are better

I wouldn’t rely on negative gearing as a core part of the investment case. The tax benefit’s too uncertain, and even if it remains, it’s a poor reason to hold a loss-making asset.

Buy properties that make sense on their fundamentals - location, yield, growth potential. If negative gearing provides a tax benefit, treat that as a bonus. If it doesn’t, you’ve still got a viable investment.

That’s the only strategy that works regardless of what happens politically.