Negative gearing is one of the most discussed — and misunderstood — tax strategies in Australian property investment. Every election cycle brings debates about whether it should be abolished, reformed, or left alone. But what actually is it, and does it make sense for your situation?

This guide explains how negative gearing works in plain English, shows you the real numbers, and helps you decide whether it's a smart strategy or an overrated tax break.

What Is Negative Gearing?

Negative gearing occurs when the costs of owning an investment property (interest, rates, maintenance, depreciation) exceed the rental income it generates. In simple terms: your property loses money each year.

But here's the twist: in Australia, you can deduct that loss from your other income — typically your salary. This reduces your taxable income and therefore your tax bill.

Gearing refers to borrowing money to invest. When the investment returns more than it costs, it's positively geared. When it costs more than it returns, it's negatively geared.

Simple Example

Without investment property:

Salary: $150,000
Taxable income: $150,000
Tax payable: ~$43,000

With negatively geared property:

Salary: $150,000
Rental income: $25,000
Property expenses: $35,000
Rental loss: $10,000
Taxable income: $140,000
Tax payable: ~$39,300

Tax saving: $3,700

That $10,000 rental loss saved $3,700 in tax (at the 37% marginal rate). But you still lost $10,000. The tax benefit partially offsets the loss — it doesn't eliminate it.

How Does Negative Gearing Actually Work?

Let's break down the mechanics with a more detailed example.

The Property

Purchase price: $600,000
Loan amount: $480,000 (80% LVR)
Interest rate: 6.5%
Weekly rent: $500 ($26,000/year)

Annual Costs

ExpenseAmount Loan interest$31,200 Council rates$2,000 Water rates$1,000 Insurance$1,500 Property management (7%)$1,820 Repairs & maintenance$1,500 Depreciation (building)$7,500 Depreciation (fixtures)$3,000 Total expenses$49,520 The Calculation

Rental income: $26,000
Total expenses: $49,520
Net rental loss: $23,520

Assuming the investor earns $150,000 salary (37% marginal rate):

Taxable income without property: $150,000
Taxable income with property: $126,480
Tax saving: $23,520 × 37% = $8,702

The Real Cash Position

But wait — depreciation is a "paper" expense. You don't actually pay it. So let's look at actual cash flow:

Rental income: $26,000
Cash expenses (excluding depreciation): $39,020
Cash shortfall: $13,020
Tax refund: $8,702
Out-of-pocket cost: $4,318/year

You're paying $4,318 per year to hold this property — about $83 per week.

Is Negative Gearing "Worth It"?

The honest answer: it depends entirely on capital growth.

Negative gearing is not a wealth-building strategy by itself. You're betting that the property will increase in value enough to offset all those years of losses.

When Negative Gearing Works

Property grows at 5-7% per year over the long term
You can comfortably afford the shortfall
You're in a high tax bracket (37%+) to maximise the tax benefit
You're investing for 10+ years
You have a stable, reliable income

When It Doesn't Work

Property prices stagnate or fall
You're forced to sell during a downturn
Interest rates rise significantly, increasing losses
You lose your job and can't cover the shortfall
You're in a low tax bracket (the tax benefit is smaller)

Key insight: A tax deduction is not free money. You're still losing money — you're just losing less after the tax benefit. A $10,000 loss with a $3,700 tax refund is still a $6,300 loss.

Negative Gearing vs Positive Gearing

Many investors focus exclusively on negative gearing, but positive gearing (where rent exceeds costs) has significant advantages.

Positive Gearing

Property puts money in your pocket each month
Less dependent on capital growth
Lower risk if interest rates rise
Easier to hold through market downturns
You pay tax on the profit

Negative Gearing

Property costs money each month
Heavily dependent on capital growth
Higher risk if interest rates rise
Harder to hold if your circumstances change
You get a tax refund on the loss

The trade-off: Negatively geared properties are often in "growth" areas (inner cities, desirable suburbs) with lower yields but higher expected growth. Positively geared properties are often in regional areas or higher-yielding suburbs with potentially lower growth.

The Depreciation Factor

Depreciation makes a huge difference to the negative gearing equation because it's a tax deduction without cash outlay.

In our example above, $10,500 of the $23,520 loss came from depreciation. Without it:

Taxable loss would be $13,020 (not $23,520)
Tax saving would be $4,817 (not $8,702)
Out-of-pocket cost would be $8,203/year (not $4,318)

This is why getting a depreciation schedule from a quantity surveyor is essential for any negatively geared property. It nearly doubles the tax benefit in this example.

Read our full guide to property depreciation schedules →

Who Should Consider Negative Gearing?

It May Suit You If:

You're in the 37% or 45% tax bracket
You have stable, long-term employment
You can comfortably afford the shortfall
You're investing for 10+ years
You believe in long-term property growth
You have an emergency fund for unexpected costs

It May Not Suit You If:

You're in a lower tax bracket (the benefit is smaller)
Your income is variable or uncertain
You'd struggle to cover the shortfall
You might need to sell within 5-7 years
You're already highly leveraged
You're approaching retirement

Common Negative Gearing Mistakes

1. Chasing Tax Deductions

Some investors buy properties primarily for the tax benefit. This is backwards. A bad investment with a tax deduction is still a bad investment. Always buy based on fundamentals first.

2. Ignoring Cash Flow

Tax refunds come once a year. You need to cover the shortfall every month. Make sure you can actually afford the property week-to-week.

3. Over-leveraging

Buying multiple negatively geared properties multiplies your exposure. If interest rates rise or rents fall, you could be in serious trouble.

4. Assuming Growth Is Guaranteed

Property prices can fall or stagnate for years. Sydney prices fell 15% in 2018-19. Perth prices took over a decade to recover from the mining downturn.

5. Not Getting a Depreciation Schedule

Without depreciation, your out-of-pocket cost could be nearly double. A $600 depreciation schedule could save you $3,000+ per year in tax.

Negative Gearing and CGT

Here's an important consideration: when you eventually sell a negatively geared property for a profit, you'll pay Capital Gains Tax (CGT) on the gain.

If you've held the property for more than 12 months, you get a 50% CGT discount — you only pay tax on half the capital gain.

Example:

Buy for $600,000, sell for $900,000
Capital gain: $300,000
After 50% discount: $150,000 added to taxable income
At 37% marginal rate: $55,500 CGT

This is why many investors aim to hold negatively geared properties long-term and into retirement when their income (and tax bracket) may be lower.

FAQ: Negative Gearing

Is negative gearing legal?

Yes, absolutely. It's a standard feature of Australia's tax system. You can deduct investment expenses from your income, just like any business can deduct its costs.

Will negative gearing be abolished?

It's been debated for decades but remains unchanged. Even if rules change, they typically grandfather existing investments.

How much can I claim?

All legitimate property expenses can be deducted: interest, rates, insurance, repairs, depreciation, property management, and more.

Do I need to wait until tax time for the benefit?

You can apply for a PAYG withholding variation, which reduces the tax taken from your salary throughout the year. Ask your accountant.

What if my property becomes positively geared?

As rent rises and your loan balance falls, many properties move from negatively to positively geared over time. This is generally a good thing — it means your property is self-funding.

Summary: Is Negative Gearing Right for You?

Negative gearing = making a loss — the tax benefit partially offsets this, but you're still losing money
It's a bet on capital growth — if the property doesn't grow, you've just lost money
Higher tax bracket = bigger benefit — at 37%, you get back 37c for every dollar of loss
Depreciation is crucial — get a quantity surveyor report to maximise non-cash deductions
Only invest what you can afford to lose — markets can fall, circumstances can change

Use Propperly's Tax Position Dashboard to see whether your properties are positively or negatively geared in real-time →

Last updated: January 2025. This guide is for general information only and does not constitute financial or tax advice. Consult a qualified accountant or financial adviser for advice specific to your situation.

Negative Gearing Explained: How It Works in Australia 2025 | Propperly