How to Use Negative Gearing as a Self-Employed Investor

Negative gearing remains one of the most misunderstood aspects of property investment, particularly for self-employed business owners who already carry a different profile when applying for an investment loan.

The structure works when your rental income sits below the holding costs on the property, including loan interest, with the loss offset against your other income. For properties held before 12 May 2026 and new builds acquired after that date, losses can still be deducted against salary, wages and business income. For established properties acquired after 12 May 2026, losses from the 2027-28 income year onward are deductible only against other residential property income, including capital gains, though excess losses can be carried forward.

The approach makes sense when you expect long-term capital growth to outpace the short-term holding costs. For business owners, the value lies in how it fits within your broader financial picture, but only if your borrowing capacity and income documentation support the structure from the outset.

How Lenders Assess Investment Borrowing for Self-Employed Applicants

Lenders reduce the rental income they use for serviceability by between 20 and 30 per cent to account for vacancy periods and maintenance costs. The loan repayment is then assessed at the product rate plus a 3.0 percentage point buffer, applied by all banks under APRA requirements.

For self-employed borrowers, most lenders require two full years of tax returns, with your net profit used as the income figure. Add-backs for depreciation and non-recurring expenses can improve serviceability, but the starting point is what you've declared to the ATO. A business owner running significant deductions to reduce taxable income will see their borrowing capacity affected, even if cash flow is strong.

Consider a scenario where a self-employed consultant in Sydney's Inner West holds a property generating $600 weekly rent. The lender calculates serviceability using 70 to 80 per cent of that income, or roughly $420 to $480 per week, while assessing repayments on the full loan amount at a rate well above what you'll actually pay. If your net taxable income is reduced by business write-offs, the shortfall between rental income and assessed repayments needs to be covered by your declared business profit, not your turnover or bank statements.

Negative Gearing Deductions Under the Current Rules

Interest on borrowings used to acquire or hold rental property is deductible against assessable income to the extent the property is rented or genuinely available for rent. Other holding costs including council rates, insurance, property management fees, repairs and depreciation are also deductible.

For properties held at 12 May 2026, losses can be deducted against all income, including your business income, until you sell. For established properties acquired after that date, losses from the 2027-28 income year onward are quarantined to residential property income, though carried-forward losses remain available to offset future gains or rental profits. New builds remain fully deductible regardless of purchase date, provided construction occurred on previously vacant land or increased the number of dwellings on the site.

The restriction from 2027-28 doesn't prevent you from claiming the deductions. It changes where those deductions can be applied. If you acquire an established investment property now and run a loss of $8,000 in the 2027-28 financial year, that loss offsets residential property income in that year or future years, but not your business income. Properties already held are unaffected.

Interest-Only Repayments and Cash Flow

Interest-only repayments reduce the monthly outgoing, which improves short-term cash flow and increases the size of the deductible expense in the early years of ownership. Principal repayments are not deductible.

Most lenders offer interest-only periods of up to five years on investment loans, though some will extend this depending on the loan-to-value ratio and the strength of your application. After the interest-only period ends, the loan converts to principal and interest unless you refinance or negotiate an extension.

For a self-employed investor managing irregular income, the lower repayment during an interest-only period provides breathing room during quieter months. The trade-off is that you're not reducing the loan balance, so the debt remains in place and the eventual principal and interest repayment will be higher once the loan reverts. Some investors refinance before reversion to maintain the lower repayment structure, particularly if they're holding multiple properties.

Loan Structures That Support Portfolio Growth

Most experienced investors separate their investment borrowing from their owner-occupied home loan. Keeping the debts separate ensures the interest on the investment loan remains fully deductible and avoids any cross-contamination if funds are later redrawn or refinanced.

Using equity in your existing home or investment property to fund the deposit on your next purchase is common, but the way the loan is structured determines how the interest is treated. If you borrow against your home to fund an investment deposit, the interest on that additional borrowing is deductible because the funds are used for an income-producing purpose. If the same funds are used for private purposes, the interest is not deductible, even though the loan is secured against your home.

A business owner in the Eastern Suburbs holding an unencumbered investment property worth roughly the suburb's current median could access equity to fund the deposit and costs on a second property without selling the first. The new borrowing is secured against the existing property, but because the funds are used to acquire another rental property, the interest remains deductible. The structure preserves your deductions and avoids triggering capital gains tax on the sale of the first property, which would occur if you sold to fund the next purchase.

Debt-to-Income Limits and How They Affect Investors

From February 2026, APRA introduced a limit requiring banks to cap new investor lending at a debt-to-income ratio of six times or greater to no more than 20 per cent of new loans each quarter. The limit applies separately to investor and owner-occupier lending.

For self-employed borrowers, the income figure used in the calculation is your net taxable income, not your turnover. If your business returns show $90,000 in net profit after deductions, your total borrowing across all loans cannot exceed $540,000 within the constrained portion of the bank's lending pool. Most borrowers sit comfortably below that threshold, but business owners with multiple properties or those using equity to build a portfolio may find themselves closer to the boundary.

The limit applies at the time of application, not over the life of the loan. If your income grows or your debt reduces, future applications are assessed on the new figures. Some lenders have more appetite for higher DTI lending than others, and non-bank lenders are not currently subject to the same restriction, though their rates are typically higher.

Capital Gains Tax Treatment for Sales After 1 July 2027

From 1 July 2027, capital gains on investment properties are taxed under a new system that indexes the cost base to inflation and applies a 30 per cent minimum tax rate on real gains accruing from that date. For properties owned before 1 July 2027 and sold afterward, gains are split, with the portion accruing before that date taxed under the existing 50 per cent discount and the portion accruing after taxed under the new indexed system.

For properties held at 12 May 2026, including those under contract awaiting settlement at that time, the grandfathered negative gearing treatment applies until sale, but the capital gains tax changes still take effect for gains accruing from 1 July 2027. New builds retain both the full negative gearing deductions and the choice between the 50 per cent discount and the new indexed treatment at the time of sale.

If you're holding an investment property in an area like Marrickville or Drummoyne, where median values have moved considerably over the past decade, the split treatment means the gain accrued up to 1 July 2027 will be taxed at your marginal rate less the 50 per cent discount, and the gain after that date will be indexed to CPI before tax is calculated. Taxpayers can either obtain a market valuation as at 1 July 2027 or use an ATO apportionment formula.

The revised structure benefits investors who are comfortable with a longer hold period. The deductions reduce taxable income now, the indexed cost base reduces the taxable gain later, and the 30 per cent minimum rate only applies where your effective rate on the indexed portion would otherwise fall below that threshold.

If your investment strategy includes acquisition, holding and portfolio growth over time, structuring your loans correctly and understanding how the deductions flow through your tax return is foundational work. Call one of our team or book an appointment at a time that works for you.

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