Negative gearing is one of the most talked-about tax strategies in Australian property investment — and one of the most misunderstood. Here’s a clear explanation of how it works, what it costs you, and when it actually makes sense as an investment strategy.
What is negative gearing?
A property is negatively geared when the costs of owning it — mortgage interest, property management fees, repairs, insurance, rates, and depreciation — exceed the rental income it generates. The resulting loss can be offset against your other income (such as your salary), reducing your overall taxable income and therefore your tax bill.
For example: if your investment property generates $24,000 in rent per year but costs $35,000 to hold, you have a $11,000 loss. If you’re on a 37% marginal tax rate, that loss saves you around $4,070 in tax. You’re still $6,930 out of pocket in cash terms — but the tax saving reduces the sting.
What costs can you deduct?
The ATO allows deductions on a wide range of investment property expenses, including: loan interest (the largest deduction for most investors), property management and letting fees, repairs and maintenance (not improvements), council rates and water charges, landlord insurance, land tax, and depreciation on the building and its fittings. It’s worth noting that travel to inspect your property is no longer deductible following 2017 rule changes.
Negative gearing vs positive gearing
Not all investment properties run at a loss. A positively geared property generates more rental income than it costs to hold, resulting in a taxable profit — but also positive cash flow. Positive gearing is often associated with regional properties or areas with high rental demand and lower purchase prices. Negative gearing tends to be more common in major capital cities where purchase prices are high relative to rents.
When does negative gearing make sense?
Negative gearing only makes financial sense if the capital growth of the property outweighs the ongoing cash losses you’re absorbing. You’re essentially betting that the property will increase in value enough to more than compensate for the shortfall between rent and costs each year. If the property doesn’t grow in value, you’ve simply been losing money each year with a partial tax refund.
This is why negative gearing tends to be more appropriate for: investors on high marginal tax rates (the tax benefit is larger), properties in high-growth locations, and investors who can comfortably carry the cash flow shortfall without financial stress. It’s generally not a good strategy for cash-strapped investors who can’t absorb the monthly loss if rates rise or the property sits vacant.
The capital gains tax interaction
When you eventually sell a negatively geared property, any capital gain is subject to Capital Gains Tax (CGT). However, if you’ve held the property for more than 12 months, you’re entitled to the 50% CGT discount — meaning only half the gain is added to your taxable income in the year of sale. This is a significant benefit for long-term investors.
Key mistakes to avoid
The biggest mistake investors make with negative gearing is treating the tax benefit as a profit rather than a partial offset of a real loss. A $4,000 tax saving does not mean you’re making money — it means you’re losing less. Always model the full cash flow position of any property before buying, and stress-test it against higher interest rates and potential vacancy periods. For more on the numbers, see our guide on how to buy an investment property in Australia.
General Advice Warning: This article is general in nature and does not constitute personal financial advice. Please consult a licensed financial adviser before making investment decisions.
