Unlock the secrets to negative gearing after separation

Negative Gearing Explained for Single Parents

Negative gearing means your rental property costs more to hold each year than it generates in rent, and you can offset that loss against your other income to reduce your tax bill. For properties you owned or had under contract by 12 May 2026, these losses can still be deducted against your salary and wages until you sell the property. From the 2027-28 income year, losses on established properties purchased after that date can only be offset against other residential property income, including capital gains on residential properties.

Consider a single parent who kept the family investment property after separation and now earns $85,000 a year in their job. The property generates $28,000 in rent but costs $32,000 in loan interest, rates, insurance and property management fees. That's a $4,000 loss. Under the current rules, that $4,000 loss reduces their taxable income to $81,000, saving around $1,200 in tax depending on their marginal rate. If they'd purchased the same property after 12 May 2026, they'd need to carry that loss forward and use it against future rental income or a capital gain when they eventually sell.

How Settlement Timing Determines Your Tax Treatment

The date your contract was signed matters more than when you settled. Properties under contract by 7:30pm AEST on 12 May 2026 are grandfathered under the old rules, even if they settled weeks or months later. If you were mid-separation during that window and finalising property arrangements, the timing of your consent orders or property settlement agreement may have locked in different tax treatment for different assets.

In our experience, separated couples sometimes transfer an investment property from joint names to one party's name as part of their financial settlement. The ATO treats that as a continuation of the original ownership for capital gains tax purposes, provided it happens as part of a formal relationship breakdown under family law. That means the grandfathering date that applies is the date the property was first acquired, not the date of the transfer between spouses. If the property was purchased before 12 May 2026, the new sole owner continues to have access to full negative gearing.

Interest Only Loans and Tax Deductible Interest

Every dollar of interest you pay on an investment loan is deductible, provided the borrowing was used to acquire or hold the rental property. Interest on borrowings used to acquire or hold residential rental property is deductible against assessable income to the extent the property is rented or held to produce assessable income. Many investors choose an interest only structure because it maximises the deductible expense and keeps monthly repayments lower, which can be particularly helpful when you're managing a single income.

As an example, a $400,000 loan at current variable rates on a principal and interest basis might cost around $2,800 per month. On an interest only basis, the repayment might drop to around $2,100 per month. Both scenarios deliver the same tax deduction in the first year, but the interest only loan leaves you with more cashflow each month to cover other expenses. The trade-off is that you're not paying down the debt, so your loan balance stays the same over the interest only period, which is typically one to five years before reverting to principal and interest.

When considering interest only loans, it's worth looking at the whole picture including how long you plan to hold the property and whether building equity or preserving cashflow is the priority right now.

Claimable Expenses Beyond the Interest

Interest is usually the largest deduction, but it's not the only one. Council rates, water charges, landlord insurance, property management fees, repairs and maintenance, and depreciation on the building and fittings all reduce your taxable income. If you're paying body corporate fees on a unit or townhouse, those are deductible too. Stamp duty paid when you purchased the property isn't immediately deductible, but it forms part of the cost base when calculating capital gains tax on sale.

We regularly see clients overlook depreciation, which is a non-cash deduction that can add several thousand dollars to your tax return each year without requiring you to spend anything. A quantity surveyor can prepare a depreciation schedule for a few hundred dollars, and that report is also tax deductible. For a newer property, the annual depreciation might be $5,000 or more in the early years. On a property with $28,000 in rental income and $32,000 in interest and other cash expenses, adding $5,000 in depreciation increases your loss from $4,000 to $9,000, which increases your tax saving accordingly.

Rental Income and Vacancy Rate Assumptions

Lenders assess an investment loan based on the rental income the property can generate, not just your salary. APRA requires all authorised deposit-taking institutions to assess new borrowers' capacity to service a home loan, including a residential investment loan, at an interest rate that is at least 3.0 percentage points above the loan product rate. Most lenders will also reduce the rental income by 20 to 25 per cent to account for vacancy, maintenance and periods between tenants, even if the property has never been vacant.

If your rental property generates $28,000 per year in rent, the lender might only recognise $21,000 to $22,400 of that income when assessing your borrowing capacity. Combined with your salary and any child support you receive, that's the income they'll stress test against the loan repayment plus a 3 percentage point buffer. If you're also looking to expand your property portfolio or refinance to release equity, understanding how rental income is treated can help you structure your application to maximise what you can borrow.

Debt to Income Limits and Investment Borrowing

From 1 February 2026, APRA activated a debt-to-income lending limit allowing each authorised deposit-taking institution to lend up to 20 per cent of new investor loans to borrowers with a total debt-to-income ratio of six times or greater. If your total borrowings across all properties and other debts equal six times your gross annual income or more, you may find it harder to access additional investment lending from a major bank, though some lenders have more flexibility.

For a single parent earning $85,000 plus $21,000 in recognised rental income after the lender's vacancy reduction, your combined income is $106,000. Six times that figure is $636,000. If your owner-occupied home loan is $350,000 and your investment loan is $400,000, your total debt is $750,000, which exceeds the six times threshold. You'd likely fall into the 20 per cent allocation that lenders must carefully ration. That doesn't mean you can't borrow, but it does mean your application will be assessed more carefully and you may need to speak with a broker who can match you to a lender with capacity in that allocation.

Using Equity to Fund Your Next Investment

If you kept the family home after separation and have built up equity, you may be able to access that equity to fund a deposit on an investment property without needing to save a separate cash deposit. Lenders mortgage insurance is generally required by authorised deposit-taking institutions on residential loans where the loan-to-valuation ratio exceeds 80 per cent. Releasing equity to stay at or below 80 per cent LVR across both properties means you can avoid paying LMI on either loan.

Suppose your home is worth $650,000 and you owe $300,000. You have $350,000 in equity. Borrowing up to 80 per cent of the property value would allow a total loan of $520,000, leaving $220,000 in usable equity after repaying your existing loan. You could use $80,000 of that equity as a deposit on a $400,000 investment property and still have funds left over for stamp duty and settlement costs. The interest on the portion of your home loan used to acquire the investment property becomes deductible, while the interest on the portion relating to your own home remains non-deductible. Keeping clear records and separate loan splits makes this much clearer at tax time.

For more on how this works in practice, the article on equity release loans goes into the mechanics and documentation.

Building Wealth Property as a Single Income Household

Property investment after separation isn't just about tax deductions. The long-term aim is building an asset that grows in value and eventually provides either passive income or a lump sum to support your retirement. Negative gearing is a mechanism that makes holding the property more affordable in the years when rental income doesn't cover costs, but the value is in the capital growth and the debt reduction over time.

If you're holding a property that's negatively geared by $4,000 per year after tax savings, and it grows in value by 4 per cent per year, a $400,000 property is adding $16,000 in equity annually while costing you $4,000 in after-tax cashflow. Over ten years, that's $40,000 in net cost and potentially $160,000 or more in capital growth, depending on the market. The numbers vary depending on location, but the principle holds. You're using borrowed money and tax deductions to hold an appreciating asset that you couldn't otherwise afford to buy outright.

For single parents rebuilding financial independence, building wealth after separation is often about taking manageable steps with the income and equity you have now, rather than waiting until circumstances feel perfect.

Refinancing Investment Loans for Better Rates

Investment loan rates are typically higher than owner-occupier rates, and the margin can be 0.3 to 0.6 percentage points depending on the lender and your loan to value ratio. If you've been with the same lender since before your separation, or if your loan has rolled onto a higher rate after an initial fixed period, refinancing can reduce your interest cost and improve your cashflow.

Reducing your rate by even 0.4 percentage points on a $400,000 loan saves around $1,600 per year in interest. That's $1,600 less in deductible expense, so your tax benefit reduces slightly, but your out-of-pocket cost still falls by around $1,200 per year after accounting for the lost deduction. Over the life of the loan, that's a material difference. Some lenders also offer features like offset accounts on investment loans, which can reduce interest without reducing your deductible expense, because the loan balance doesn't change.

If you're comparing options, investment loan refinancing covers how to assess whether a switch makes sense and what costs to watch for.

What Happens When You Sell the Investment Property

When you sell, any capital gain is added to your taxable income in the year of sale. The 50 per cent capital gains tax discount continues to apply to capital gains accruing on all residential property up until 1 July 2027, for individuals, trusts and partnerships who have held the asset for more than 12 months. From 1 July 2027, the 50 per cent discount is replaced by cost base indexation using the Consumer Price Index and a 30 per cent minimum tax rate on real capital gains accruing from that date.

If you bought an investment property for $400,000 in early 2024 and sell it for $500,000 in late 2027, you have a $100,000 gain. For the portion of the gain accruing before 1 July 2027, you apply the 50 per cent discount. For the portion accruing after 1 July 2027, you index the cost base and pay tax on the real gain at a minimum 30 per cent rate. The ATO will publish an apportionment formula, or you can get a market valuation as at 1 July 2027 to split the gain more precisely. If your marginal tax rate in the year of sale is below 30 per cent, including because you're receiving certain government payments, the minimum rate may not apply to you.

All the carried-forward losses you've accumulated over the years of negative gearing can be used to offset the capital gain, which reduces the taxable amount. That's one of the core benefits of the strategy: the tax deductions during ownership reduce your annual tax, and the carried-forward losses reduce your tax again on sale.

Rebuilding your financial position after separation takes time, and investment property can be part of that picture if the numbers work and you're comfortable with the commitment. The tax treatment has changed for new purchases, but the fundamentals around cashflow, equity and long-term growth haven't. If you're weighing up whether to hold a property you already own, buy something new, or focus your capital elsewhere, talking through your specific situation with someone who understands both the lending and the tax side can help you make a decision that fits your circumstances.

Call one of our team or book an appointment at a time that works for you.

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