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........

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