Understanding the Basics of Negative Gearing

Negative gearing allows you to claim the shortfall between rental income and holding costs against your taxable income.

For many dentists, it's one of the few ways to reduce tax exposure while building assets outside the practice. The mechanics are straightforward: when the annual interest, rates, insurance and other deductible costs on an investment property exceed the rent you collect, that loss reduces your assessable income. If you earn $200,000 as a general dentist and your investment property loses $15,000 for the year, you're taxed on $185,000 instead.

The rules changed partway through 2026. Properties held or under contract by 12 May 2026, and all new builds regardless of purchase date, continue to allow full deductibility of losses against any income. Established properties purchased after that date face restrictions from the 2027-28 income year onward: losses can only offset income from other residential properties, not your salary. Carried-forward losses remain available to use against future property income or capital gains.

How the Deduction Works Across Loan Types

Interest on any loan used to purchase or hold the rental property is deductible, whether the loan is variable, fixed, interest-only or principal-and-interest.

Consider a dentist who borrows at a variable rate to acquire a two-bedroom apartment held for rental. The annual interest bill is $28,000, body corporate fees are $4,500, rates and insurance total $3,200, and property management costs $2,800. Rental income for the year is $26,000. The loss is $12,500, and that amount reduces taxable income in the same year it's incurred. The repayment structure doesn't change the deduction: interest-only repayments mean the full interest component is deductible, while principal-and-interest repayments still only allow the interest portion to be claimed. Principal repayments are not deductible because they represent acquisition of equity, not a cost of holding the asset.

Lenders typically offer interest only loans for dentists on investment properties for terms up to five years, after which the loan reverts to principal and interest unless refinanced or restructured. The choice between repayment types affects cash flow and total interest paid over the life of the loan, but both structures preserve the tax deduction on interest as it accrues.

Why Dentists Use Negative Gearing Alongside Practice Equity

Most established dentists hold significant equity in their practice or principal residence by mid-career, but that equity isn't liquid and doesn't diversify income sources.

Negative gearing on residential property allows you to leverage existing equity without selling down the practice or taking on a second clinical role. You borrow against the value in your home or practice premises, use those funds as a deposit on a rental property, and claim the holding costs against your income each year. The rental property is held separately from your practice structure, which means it isn't exposed to professional indemnity claims or partnership disputes. Tax relief in the accumulation phase offsets the cash flow gap, and long-term capital growth becomes accessible on sale.

In our experience, the calculation works for dentists in the top marginal bracket who expect the property to appreciate and who can service the shortfall from salary without stress. It doesn't suit every situation: early-career dentists with variable hours, those carrying significant practice acquisition debt, or professionals planning to step back from full-time work within a few years may find the cash flow burden outweighs the tax benefit. The structure is a holding cost for future gain, not an income replacement.

Offset Accounts and Deductibility

Funds held in an offset account linked to an investment loan reduce the interest charged, but they also reduce the amount you can claim as a deduction.

If your loan balance is $500,000 and you hold $50,000 in the offset, you're charged interest on $450,000. You can only claim a deduction on the interest actually charged. This is different from a redraw facility, where withdrawn funds may lose their deductible character if used for private purposes. Offset accounts are useful when you want flexibility without blurring the line between investment and personal borrowing, but they don't increase your tax deduction. The Australian Taxation Office treats offset balances as reducing the loan exposure, so the lower interest cost flows directly to a lower deduction.

For dentists using equity from their principal residence to fund an investment deposit, the question becomes whether to park surplus cash in an offset against the home loan or the investment loan. Paying down non-deductible debt first generally makes sense from a tax perspective, unless the investment loan carries a higher rate and the dollar saving outweighs the forgone deduction.

Depreciation and Other Claimable Expenses

Beyond interest, you can claim rates, insurance, property management fees, repairs and depreciation on the building and fixed assets within the property.

Depreciation is a non-cash deduction, meaning it reduces taxable income without an actual outgoing in that year. A quantity surveyor prepares a depreciation schedule, typically costing between $600 and $900, which sets out the annual claim for capital works (the building itself) and plant and equipment (carpet, blinds, appliances). For properties built after 1985, capital works can be claimed at 2.5 per cent per year for 40 years. Plant and equipment depreciation applies only to assets you've purchased new; second-hand assets acquired with an established property after May 2017 are no longer depreciable for tax purposes under changes introduced at that time.

Repairs are immediately deductible if they restore the property to its previous condition. Improvements that enhance the property are treated as capital and added to the cost base for capital gains tax purposes rather than claimed as an annual deduction. Stamp duty on the property purchase, and LMI premiums if applicable, are also added to the cost base rather than claimed as holding costs. These distinctions matter when calculating both annual deductions and the eventual tax on sale.

Grandfathering, New Builds and the 2026 Rule Change

Properties you owned or had under contract by 7:30pm on 12 May 2026 remain fully negatively gearable against all income indefinitely, regardless of whether they were new or established at the time of purchase.

New builds acquired after that date, meaning dwellings constructed on previously vacant land or developments that increase the number of dwellings on a site, also continue to allow losses to be claimed against salary and other income from the 2027-28 year onward. A knock-down rebuild that replaces one dwelling with one dwelling is not treated as a new build. If a developer occupies a new build for more than 12 months before selling it, the next purchaser loses access to the new build exemption and falls under the established property rules.

Established properties purchased after 12 May 2026 can still be negatively geared in the ordinary sense: you still claim all the same deductions, but from 1 July 2027 those deductions only offset income from other residential rental properties or capital gains on residential property. Losses that exceed your residential property income in a given year are carried forward and remain available to use in future years. This doesn't prevent you from borrowing to invest in established property, but it changes the cash flow equation if you don't already hold other investment properties generating assessable income.

Serviceability, DTI Limits and How Lenders Assess Investment Loans

Lenders assess your ability to service an investment loan by adding a buffer of at least 3 percentage points to the actual interest rate and applying a discount to the rental income, typically between 20 per cent and 30 per cent depending on the lender.

If the loan rate is 6.2 per cent, the lender tests serviceability at 9.2 per cent or higher. Rental income of $26,000 per year is assessed at around $18,200 to $20,800 after the vacancy and management discount is applied. The net rental income after the discount is added to your salary, and all your liabilities, including the new loan serviced at the buffered rate, are tested against that total. This is a much tighter assessment than simply checking whether the property is cash flow neutral at the actual rate.

From February 2026, a debt-to-income limit also applies: no more than 20 per cent of new investor loans from any lender can be written to borrowers with total debt of six times income or more. If your income is $220,000 and your total borrowing across home and investment loans would reach $1.32 million or higher, you may fall into that top 20 per cent, which means some lenders will decline the application even if serviceability at the buffered rate is met. The DTI limit applies at the lender level, not the borrower level, so switching lenders or splitting your borrowing may still be possible, but it requires more detailed structuring than it did prior to 2026.

Refinancing Investment Loans and Accessing Equity for Further Property

Once you've held an investment property for a period and it has increased in value, you can access that equity to fund a deposit on a second property without selling the first.

This is typically done by refinancing the investment loan to a higher amount, with the additional borrowing used solely for investment purposes so the interest remains deductible. If the property was purchased for $650,000 and is now worth $780,000, and your loan balance has reduced to $480,000, you may be able to refinance up to 80 per cent of the new value (around $624,000) without paying LMI, releasing approximately $144,000. That amount can be used as a deposit on a second investment property. Provided the new borrowing is used to acquire or hold an income-producing asset, the interest on the increased loan remains deductible.

Lenders reassess your serviceability each time you refinance, applying the same buffer and rental income shading as they did on the original loan. Your total debt position, including the increased borrowing, is tested against your current income. If you've reduced clinical hours, taken on a parental leave period, or increased your non-deductible debt in the meantime, the refinance may not be approved at the amount you're seeking. Timing matters: applying before a planned reduction in hours or a shift to part-time work gives you access to equity while your income still supports the structure.

Capital Gains Tax and Indexation from July 2027

When you sell an investment property, the difference between the sale price and the cost base is subject to capital gains tax.

Under the current rules, individuals who have held the property for more than 12 months receive a 50 per cent discount on the gain. From 1 July 2027, the discount is replaced by cost base indexation and a 30 per cent minimum tax rate on real gains for most residential investment properties. You index the cost base in line with inflation, calculate the gain on the indexed base, and pay tax on that gain at your marginal rate or 30 per cent, whichever is higher. For properties owned before 1 July 2027 and sold afterward, the gain is apportioned: the portion accruing before 1 July 2027 is taxed under the 50 per cent discount method, and the portion accruing from that date is taxed under the indexed method. You can obtain a market valuation as at 1 July 2027 to establish the split, or use a formula the ATO will publish.

New builds remain eligible for both the 50 per cent discount and the indexed method, and you choose the more favourable treatment at the time of sale. Stamp duty, LMI, and capital improvements are added to the cost base and reduce the taxable gain. Depreciation claimed during ownership is not clawed back on sale, but it does reduce the cost base for plant and equipment, which can increase the taxable portion of the gain.

The interaction with negative gearing is indirect but important: if you've carried forward losses from prior years, those losses can offset the capital gain when you sell, provided the gain is from residential property. If you're still holding the property in the 2027-28 year or later and it's an established property purchased after May 2026, your annual losses can only be used against residential property income or gains, so a large capital gain on sale may be the first opportunity to use several years of accumulated losses.

Call one of our team or book an appointment at a time that works for you. We'll step through your current position, the properties or opportunities you're considering, and the way the loan structure and tax treatment align with where you're heading over the next decade.

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