Top Strategies to Use Negative Gearing in Parramatta

Negative gearing lets you offset your rental property losses against your other income, including your salary.

That's useful in Parramatta, where median prices have risen faster than rental yields over the past few years, meaning many new investors pay more in interest and holding costs than they collect in rent. The deduction can reduce your tax bill by thousands of dollars a year, though the rules changed in mid-2026 and you need to know what still qualifies.

What Negative Gearing Means for a Parramatta Investor

Negative gearing happens when your deductible costs on an investment loan exceed your rental income for the year. You can claim that loss against your other assessable income, which reduces the tax you pay. Interest on the loan is usually the largest deduction, but you can also claim council rates, insurance, body corporate fees if you own a unit near Church Street or around Westfield, property management, repairs, and depreciation. If you purchased your Parramatta property before 12 May 2026, or if you bought a new build after that date, you can continue to claim those losses against your salary or practice income until you sell. For established properties purchased after 12 May 2026, losses from the 2027-28 income year onward can only offset income from other residential properties or gains when you sell.

How the 2026 Rule Change Affects Properties You Already Own

Any property you owned or had under contract by 7:30pm on 12 May 2026 is grandfathered. That means the loss is still fully deductible against all your income, just as it was before the change. This applies to established units, townhouses, and houses across Parramatta, whether you bought near the university precinct, around Rosehill, or closer to the CBD. The grandfathering provision continues until you sell the property. If you bought an established property after that date, losses are quarantined to residential property income from the 2027-28 financial year forward. In our experience, this shifts the appeal of established dwellings toward buyers who already own other rental properties, because they can use the loss to offset income from those holdings.

New Builds Still Qualify for Full Negative Gearing

New builds remain exempt from the quarantine rule indefinitely. A new build is defined as a dwelling constructed on previously vacant land or a development that increases the number of dwellings on the site. A knock-down rebuild that replaces one house with another single house does not qualify. Neither does a substantial renovation of an existing dwelling. For a medical professional working at Westmead Hospital or a resident looking to build a portfolio, buying a new apartment in one of the developments around Parramatta Square or a newly completed townhouse near the river still gives you access to negative gearing against your full income, just as the old rules allowed. Once a new build has been occupied for more than 12 months and is then sold to a second investor, that subsequent buyer loses the exemption and the property is treated as established.

Structuring Your Loan to Protect Your Deductions

Interest is only deductible to the extent the borrowed funds are used to purchase or hold the rental property. If you borrow $600,000 to buy a two-bedroom unit in Parramatta and the entire amount is secured against that unit, the full interest amount is claimable. If you later redraw funds from that loan for a private purpose, such as a holiday or a car, the interest on the redrawn portion is no longer deductible. The safest approach is to keep your investment loan separate from any personal borrowing and avoid redrawing from the investment facility. An offset account linked to your owner-occupied loan can hold spare cash without affecting the deductibility of your investment interest. We regularly see this structure with doctors and specialists who have variable income and want to maintain flexibility without losing deductions.

Interest-Only Versus Principal and Interest for Negative Gearing

An interest-only loan gives you a larger deduction in the early years because your repayments are higher relative to the principal you're paying down. Most lenders offer interest-only terms for up to five years on an investment loan, after which the loan reverts to principal and interest. The benefit is that you maximise your cash flow and your deduction during the interest-only period, which is often when your taxable income is highest. Consider an investor who borrows to buy a unit near the Parramatta River and earns a high marginal rate as a surgeon. Over the first five years, an interest-only loan on that property will deliver a deduction several thousand dollars larger each year than a principal and interest loan at the same rate. Once the loan reverts, the repayment rises but the investor has had five years of improved cash flow and lower tax. The choice depends on your cash position and your intention to hold or sell within that period.

How Vacancy and Holding Costs Affect Your Claim

You can only claim deductions for the period the property is rented or genuinely available for rent. If your Parramatta unit sits vacant for three months because you're renovating or because you chose not to advertise it, the interest and holding costs for that period are not deductible. If the property is advertised at a reasonable rent and remains vacant because no tenant applied, the costs remain claimable. The Australian Taxation Office looks at whether you made a genuine effort to secure a tenant at market rent. Parramatta's vacancy rate has been low in recent years, particularly for units within walking distance of the station and Westfield, so extended vacancy is unusual unless the property needs work or the rent is set too high. Keep records of your advertising and any communication with your property manager to support your claim.

Refinancing and Deductibility After a Rate Rise

If you refinance your investment loan to a lower rate, the interest on the new loan remains fully deductible, provided the borrowed amount does not exceed the balance you're refinancing and the funds continue to be used for the investment property. Where investors run into trouble is when they refinance and increase the loan amount to access equity for a private purpose. That additional borrowing is not deductible. If you're refinancing to pull out equity for a deposit on a second investment property, the interest on the additional amount is deductible against the second property, not the first. This is why loan structure matters from the outset. A loan health check before refinancing will identify whether your current structure protects your deductions or whether a split is needed to quarantine the new borrowing.

Capital Gains and the Interaction with Negative Gearing

Negative gearing reduces your tax while you hold the property, but capital gains tax applies when you sell. For properties held before 1 July 2027 and sold after that date, gains are split into a pre-July 2027 portion, which qualifies for the 50 per cent discount if you've held for more than 12 months, and a post-July 2027 portion, which is indexed to inflation and taxed at a minimum 30 per cent rate on the real gain. Investors in eligible new builds can choose between the old discount method and the new indexed method at the time of sale, depending on which delivers the lower tax. The interaction means that properties bought in Parramatta during recent price growth, particularly units near the CBD or around the university, may generate a large assessable gain even after indexing. The deductions you claimed during ownership do not reduce your capital gain, but they do reduce your overall tax position across the holding period. Your accountant will model both treatments when you're ready to sell.

Red Sea Lending works with property investors across Parramatta and Westmead who want their loan structure to support their tax position without creating problems down the line. Call one of our team or book an appointment at a time that works for you.

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