Negative Gearing in Australia: How It Works, Who It Suits, and Is It Worth It?

⚠️ IMPORTANT UPDATE — July 2026: The negative gearing rules have changed. For properties purchased after 7:30pm AEST 12 May 2026, rental losses can no longer be offset against salary or other income — only against residential property income from other properties. Existing properties are fully grandfathered. New builds are exempt. → Read our full guide: Negative Gearing Changes 2026

Negative gearing is one of the most talked-about tax strategies in Australian property investing — and also one of the most misunderstood. Some investors swear by it. Others think it’s been oversold. The truth, as usual, sits somewhere in between.

This guide explains exactly how negative gearing works in Australia, who it genuinely benefits, what the risks are, and how it fits into a broader investment strategy.

What Is Negative Gearing?

A property is negatively geared when the costs of owning it exceed the rental income it produces — creating a net loss.

Those costs typically include:

• Loan interest (by far the largest component)
• Property management fees
• Council rates and water
• Insurance
• Repairs and maintenance
• Depreciation on the building and fixtures

When your property runs at a loss, the Australian Tax Office allows you to deduct that loss against your other income — reducing your taxable income and therefore your tax bill.

This is negative gearing in a nutshell: you’re losing money on the property in the short term, but getting a government-subsidised tax offset that softens the blow.

How Negative Gearing Works: A Real Example

Let’s say you earn $130,000 per year in salary and you own an investment property that produces the following:

That $7,780 loss is deducted from your $130,000 salary — meaning you’re assessed on $122,220 instead of $130,000. At the 37% marginal tax rate, that’s approximately $2,879 in tax saved. The property costs you $7,780 out of pocket per year, but you get $2,879 back at tax time — meaning the real after-tax cost is closer to $4,901 per year (about $94 per week). Whether that’s worth it depends entirely on whether the property grows in value fast enough to justify the ongoing loss.

What Can You Claim? The Full List of Deductible Expenses

Understanding what counts as a deductible expense is critical to accurately calculating your position.

You CAN deduct:

• Interest on your investment loan (not principal repayments — only the interest component)
• Property management fees
• Advertising for tenants
• Council rates and land tax
• Water rates
• Body corporate fees
• Building and contents insurance
• Repairs and maintenance (to restore the property to its original condition)
• Depreciation on the building (Division 43) and on fixtures and fittings (Division 40)
• Accounting fees related to the property
• Legal fees for lease disputes

You CANNOT deduct:

• Capital improvements (these are added to the cost base for CGT purposes instead)
• Principal repayments on your loan
• Personal use expenses if the property is mixed-use

Depreciation is a big one. On a newer property, depreciation can add thousands of dollars in paper deductions each year without any actual cash outflow. A quantity surveyor report (around $600–$800) can unlock significant depreciation claims — well worth it for properties built after 1987.

The Tax Math: Why Your Marginal Rate Matters

Negative gearing works best for people in higher tax brackets, and here’s exactly why.

An investor on $200,000/year salary gets $4,500 back per $10,000 of property losses. An investor on $50,000/year gets $3,250. The strategy is genuinely more powerful for high-income earners.

Negative Gearing vs Positive Gearing vs Neutral Gearing

Positively geared properties generate taxable income — which is a good problem to have if the property is also growing in value, but it does mean you pay more tax each year. Many investors start negative and move toward neutral or positive over time as rents rise while their loan balance stays the same or reduces.

The Capital Growth Equation: When Negative Gearing Makes Sense

The critical point that often gets lost in the negative gearing debate: the strategy only makes sense if your capital growth outweighs your cumulative losses.

Here’s the maths over a 10-year hold:

• Property bought for $700,000
• Annual after-tax loss: $5,000
• Total after-tax losses over 10 years: $50,000
• Property value after 10 years at 6% annual growth: $1,253,000
• Capital gain: $553,000 (minus 50% CGT discount = $276,500 taxable)
• Even after paying CGT at 37%: net gain of $450,000+

The $50,000 in losses looks inconsequential against that backdrop. But if the property doesn’t grow, you’ve simply been subsidising losses with no payoff. This is why property selection matters far more than the tax structure.

The Risks of Negative Gearing

1. Interest Rate Risk

Your cash flow shortfall is heavily tied to your loan interest rate. If you modelled your investment at 4.5% and rates rise to 6.5%, your annual losses can increase by thousands of dollars. Always stress-test your projections at higher rates before committing.

2. Vacancy Risk

If the property sits vacant for weeks or months, your costs continue but your income stops. Make sure you have cash reserves to cover at least 3 months of vacancy.

3. Capital Growth Risk

This is the big one. If you buy in an area that underperforms, you accumulate years of losses without the offsetting capital gain. Choose your location carefully — see our guide to choosing the right suburb for property investment.

4. Income Risk

Your tax benefit evaporates if your income drops — job loss, parental leave, business downturn. If you move from the 37% bracket to the 19% bracket, the value of each deductible dollar nearly halves.

5. Policy and Rule Changes

Negative gearing rules changed on 12 May 2026. For properties purchased after that date, rental losses cannot be offset against salary income. See our full Negative Gearing Changes 2026 guide for all the details.

Negative Gearing and Depreciation: A Powerful Combination

One way to boost the tax benefits of a negatively geared property without increasing your actual cash losses is through depreciation.

Depreciation is a non-cash deduction — the ATO lets you claim the “wear and tear” on the property’s building structure and fixtures each year.

Division 40 covers plant and equipment: ovens, dishwashers, carpet, blinds, hot water systems. These can be depreciated over their effective life (typically 5–15 years).

Division 43 covers the capital works (the building itself). For properties built after September 1987, you can claim 2.5% of the original construction cost per year for 40 years.

A new $600,000 apartment in a building with $350,000 in original construction costs might yield $8,750/year in Division 43 depreciation alone — on top of the plant and equipment claims. Get a quantity surveyor’s depreciation schedule for any investment property. It typically pays for itself within the first year.

Is Negative Gearing Right for You?

Negative gearing suits investors who:

• Are in the 37% or 45% marginal tax bracket (income above $120K)
• Have strong cash reserves to cover the ongoing out-of-pocket shortfall
• Are buying in a high capital growth location and planning a long hold (7–10+ years)
• Have stable, high income they expect to maintain throughout the hold period
• Are focused on building long-term wealth, not short-term cash flow

It’s less suitable for investors who:

• Are on lower incomes where the tax benefit is modest
• Need the property to be cash flow neutral or positive from day one
• Are investing in markets with lower capital growth prospects
• Don’t have buffer funds for rate rises or vacancies

Negative Gearing Frequently Asked Questions

The Bottom Line

Negative gearing is a legitimate tax strategy — not a loophole, not a magic money machine. The government allows property investors to deduct losses against their income because rental housing forms a core part of Australia’s housing supply.

The strategy works well for high-income earners buying quality properties in high-growth areas with a long-term hold in mind. It doesn’t work for investors who overpay for poor-quality assets in flat markets and expect the tax break to save them.

Use negative gearing as one tool among many. Understand your cash flow position at different interest rates. Make sure you can sustain the losses without financial stress. And choose your property based on fundamentals, not just the tax outcome.

For more on building a long-term property investment strategy in Australia, see our guide: How to Build a Property Portfolio from Scratch in Australia

For the complete breakdown of every deduction available — from loan interest and depreciation to borrowing costs, strata levies, and insurance — see our guide to investment property tax deductions in Australia.

This article is for general informational purposes only and does not constitute financial or tax advice. Speak with a qualified accountant or financial adviser before making investment decisions.

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.