What Negative Gearing Actually Means
Negative gearing is a tax arrangement, not an investment strategy in itself. A property is negatively geared when its rental income is less than the total costs of owning it — interest on the mortgage, maintenance, property management fees, council rates, insurance and depreciation. The "negative" refers to a net loss from the investment. Under Australian tax law, this net loss can be deducted from your other taxable income, reducing the total income tax you pay.
The benefit is therefore a tax reduction — not a profit. A negatively geared investor is still losing money on a cash flow basis. The strategy makes rational sense only when you expect the capital growth of the property to exceed the cumulative losses (adjusted for the tax benefit) over the holding period. This is why negative gearing is most defensible in high-growth markets and most questionable in flat or declining ones.
An Important Clarification
Negative gearing is sometimes misunderstood as the government subsidising property losses. More precisely, it is the consistent application of standard tax deductibility principles — losses from income-producing investments are generally deductible. The policy debate concerns whether this consistent application creates distortions in the housing market, which is a separate question from whether it is legal and available. It is both.
How the Tax Deduction Works — With Numbers
A concrete example illustrates the mechanics clearly.
| Item | Annual Amount (AUD) |
|---|---|
| Rental income received | $28,600 ($550/week) |
| Mortgage interest (6.5% on $600k loan) | $39,000 |
| Property management (8%) | $2,288 |
| Repairs and maintenance | $2,500 |
| Council rates and water | $2,800 |
| Building insurance | $1,800 |
| Depreciation (on fittings) | $3,500 |
| Total costs | $51,888 |
| Net rental loss (negative gearing amount) | $23,288 |
If this investor earns $150,000 in personal income, their taxable income reduces from $150,000 to $126,712 ($150,000 minus $23,288). At the marginal rate of 37% (plus 2% Medicare Levy), this saves approximately $9,082 in tax for the year. The investor is still losing $23,288 annually in real terms but receives $9,082 of that back through reduced tax — a net cash cost of $14,206 per year, or roughly $273 per week out of pocket.
Depreciation: The Non-Cash Deduction
Depreciation deserves specific attention because it is a deductible cost that does not require actual cash expenditure in the year claimed. Investors can claim depreciation on the building structure (Division 43) at 2.5% per year on construction cost, and on plant and equipment items (Division 40) — carpets, appliances, hot water systems — at declining value rates. A quantity surveyor's depreciation schedule (cost: $400–700) quantifies the claimable amounts and pays for itself many times over in tax savings on a new or reasonably modern property.
Depreciation is only available on properties where construction commenced after 15 September 1987. For older properties, plant and equipment depreciation is still available on new items installed. The combination of depreciation and interest deductions can make a property appear significantly more negatively geared on paper than it is in cash terms, which sometimes misleads investors about their actual cash position.
Positive Gearing — The Alternative Approach
The counterpart to negative gearing is positive gearing: the rental income exceeds all ownership costs, producing a taxable profit. Positively geared properties generate immediate cash flow but the rental income is taxable at your marginal rate, reducing the net income. In Melbourne's current market, positively geared properties are generally found in the outer suburbs and regional centres where purchase prices are lower relative to achievable rents. Gross yields of 5–6%+ are typically required to reach positive cash flow after all expenses.
| Strategy | Cash Flow | Tax Treatment | Best Suited To |
|---|---|---|---|
| Negative gearing | Net outgoing each week | Loss offsets other income | High-income earners in growth markets |
| Neutral gearing | Break-even | Minimal tax impact | Investors wanting capital growth without ongoing cost |
| Positive gearing | Net income each week | Rental profit added to taxable income | Lower-income investors or retirees seeking income |
Capital Gains Tax and the 50% Discount
When a negatively geared property is eventually sold, capital gains tax (CGT) applies to the profit. For properties held longer than 12 months, Australian tax law provides a 50% CGT discount — only half the capital gain is added to taxable income in the year of sale. This discount interacts directly with the negative gearing strategy: the losses claimed during the holding period reduce taxable income at your full marginal rate (up to 47%), while the eventual capital gain is taxed at half that effective rate. The asymmetry is the core tax advantage of the strategy.
Who Benefits Most — and Who Should Be Cautious
Negative gearing delivers the largest tax benefit to investors in higher tax brackets. At a 47% marginal rate, each dollar of rental loss saves 47 cents in tax. At a 19% marginal rate, the same loss saves 19 cents. An investor on $80,000 per year (32.5% marginal rate) gets approximately 34.5 cents per dollar of loss returned — meaningful but significantly less than a $200,000 earner. For low-income earners or investors with minimal other income, the tax benefit is small and the cash flow drain is real; these investors are generally better served by positively geared properties.
Frequently Asked Questions
Is negative gearing likely to be abolished in Australia?
Negative gearing has been on the political agenda periodically but has survived every reform debate. The 2019 federal election was fought partly on Labor's policy to limit negative gearing to new properties — the policy was not enacted following Labor's loss. The current government (as of 2026) has not indicated an intention to change negative gearing rules. The policy is entrenched partly because millions of Australian property investors benefit from it and are likely to vote against changes. Significant reform remains possible over a long time horizon but cannot be relied upon for investment planning purposes. Investors should assume current rules for the medium term and monitor legislative developments.
Can I negatively gear shares or other investments, not just property?
Yes. Negative gearing applies to any income-producing investment where costs exceed income. Borrowing to invest in shares (a margin loan) creates negative gearing if the interest costs exceed dividends received. The same deductibility rules apply. The key practical difference is volatility: shares can lose 30–40% of value quickly, and margin loans can trigger margin calls requiring additional funds or forced selling. Property negative gearing is more widely practised partly because property's lower volatility and predictable income stream make the cash flow more manageable over the holding period.
At what income level does negative gearing make most sense?
The tax benefit is most powerful at incomes above $120,000 (where the 37% marginal rate applies) and particularly above $180,000 (47% marginal rate including the Medicare Levy Surcharge). Below $80,000 the benefit is modest enough that the cash flow drain can outweigh it, particularly in a flat capital growth environment. The strategy should always be modelled with realistic growth assumptions — claiming it works at 3% annual growth when the suburb has averaged 2% is the most common error in investor projections.
Official Resources
ATO — Rental Property Deductions
ASIC MoneySmart — Property Investment