Negative gearing is one of Australia's most debated tax strategies. Supporters say it helps investors provide rental housing. Critics say it distorts the market. What it actually does to your tax return is simpler than the politics suggests.
What Is Negative Gearing?
A property is negatively geared when the costs of owning it exceed the rental income it generates. In simple terms: you are losing money on the property each year on paper.
The tax benefit comes from the fact that this paper loss can be offset against your other income — most commonly your salary — reducing the amount of tax you pay overall.
A Worked Example
Say you earn $120,000 a year (marginal tax rate: 37%). You buy an investment property for $650,000 with a $130,000 deposit (20%) and borrow $520,000 at 6.2% interest-only.
| Annual rental income | $28,600 ($550/week) |
| Interest cost (6.2% × $520k) | −$32,240 |
| Council rates, insurance, repairs | −$5,000 |
| Property management (8%) | −$2,288 |
| Net rental loss | −$10,928 |
| Tax saving (37% × $10,928) | +$4,043 |
| True out-of-pocket cost per year | $6,885 (~$132/week) |
Without the tax benefit, you are out $10,928/year. With it, you are out $6,885/year. The government is effectively covering $4,043 of your holding cost — which is why negative gearing is more valuable to high-income earners (higher marginal rate = bigger tax saving).
Depreciation: The Hidden Accelerator
The example above does not include depreciation, which is a non-cash deduction that can significantly increase the paper loss without any additional cash outflow.
For new properties, you can depreciate both the building structure (at 2.5% of build cost per year) and the fixtures and fittings (at varying rates). A tax depreciation schedule from a quantity surveyor (typically $600–$800) can add $5,000–$15,000 of additional deductions per year on a new property.
For established properties built before 1987, you cannot claim building depreciation, but you can still claim on fixtures installed after that date.
Capital Gains Tax When You Sell
Negative gearing is only half the equation. The strategy works on the assumption that the property will grow in value enough to cover the accumulated losses and the tax bill on sale.
When you sell an investment property, you pay Capital Gains Tax (CGT) on the profit. If you hold the property for more than 12 months, you get a 50% CGT discount — meaning only half the gain is added to your taxable income.
Who Does Negative Gearing Actually Suit?
Negative gearing is best suited to investors who:
- Have a high income — the tax saving is proportional to your marginal rate. Below $45,000/year (16% marginal rate), the numbers rarely stack up.
- Have strong cash flow — you must actually be able to cover the shortfall each month. The tax saving arrives once a year at tax time, not monthly.
- Have a long time horizon — the strategy relies on capital growth to justify the ongoing losses. It is not a short-term play.
- Are buying in growth locations — a negatively geared property in a stagnant market is just a money-losing asset.
The Risks
- Interest rate rises — higher rates increase your interest cost, worsening the cash flow position. This caught many investors off guard in 2022–2023.
- Vacancy periods — no rental income, but costs continue. Plan for at least 2–4 weeks vacant per year.
- Policy risk — negative gearing has been politically contested; a future government could limit or remove the tax treatment.
- Over-leverage — using the tax saving to justify borrowing more than you can comfortably service is a trap. Model conservative scenarios.
Run the Numbers for Your Situation
Every investor's situation is different — income level, property price, interest rate, depreciation profile, and growth assumptions all change the outcome. Use our Negative Gearing Calculator to model your specific scenario with accurate Australian tax brackets.
And if you're ready to explore investment property financing, speaking with a mortgage broker who specialises in investor loans is a good next step. They can structure your loan to maximise deductibility and minimise holding costs.
Key Takeaways
- Negative gearing = rental costs exceed rental income, creating a tax-deductible loss
- The tax saving is bigger at higher marginal rates — most valuable above $120k income
- Depreciation on new properties significantly increases the paper loss without extra cash cost
- The full strategy only works if capital growth outpaces the accumulated losses
- Always model cash flow and CGT on exit — not just the annual tax saving