Negative gearing is one of the most discussed — and most misunderstood — tax strategies in Australian property investing. Here's what it actually means, when it benefits you, and the real risk that most articles don't mention.
Loss
Required to claim negative gearing
47%
Max tax saving (top rate)
CGT
50% discount on long-term gains
Growth
The required ingredient
What Is Negative Gearing?
A property is negatively geared when the annual rental income it generates is less than the annual costs of owning it. The "costs" include interest on the investment loan, property management fees, council rates, insurance, repairs, and depreciation.
When costs exceed rental income, you have a net loss on the investment. In Australia, this net loss can be deducted against your other income (e.g., your salary) — reducing your taxable income and therefore your tax bill. This tax offset is the core of the negative gearing strategy.
Simple Example
| Item | Annual Amount |
|---|---|
| Rental income | $28,000 |
| Interest on loan ($650K at 6.8%) | −$44,200 |
| Property management, rates, insurance | −$5,400 |
| Depreciation (building + fittings) | −$6,000 |
| Net loss (deductible against salary) | −$27,600 |
| Tax saving (at 37% marginal rate) | +$10,212 |
| Net annual cash outflow (after tax saving) | −$17,388 (~$334/wk) |
Illustrative only — actual figures depend on property, location, rental yield, depreciation schedule, and personal tax rate. Get your own tax advice.
Who Benefits Most from Negative Gearing?
The tax benefit from negative gearing scales with your marginal tax rate:
- Top rate (47% incl. Medicare Levy): Best outcome — every $1 of loss saves $0.47 in tax
- 37% rate ($120K–$180K income): Good benefit — $0.37 saved per $1 of loss
- 32.5% rate ($45K–$120K): Meaningful but less dramatic
- Under $45K income: Limited benefit — not typically recommended as a primary strategy at lower incomes
Negative gearing is best suited to high-income earners who can absorb the ongoing cash outflow and are patient enough to wait for capital growth.
The crucial ingredient everyone forgets
Negative gearing only makes financial sense if the property grows in value enough to offset the annual cash losses. The tax saving reduces your cost — but you're still losing money each year. If the property doesn't grow (or falls in value), the strategy fails even with the tax benefit. Capital growth is not guaranteed.
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Positive Gearing vs Negative Gearing
A positively geared property is one where rental income exceeds total costs — the property generates a profit each year. Positively geared properties typically have higher rental yields relative to their price — common in regional areas, high-density residential, or commercial property.
- Negative gearing: Short-term cash loss offset by tax saving, relies on capital growth for return. Better in high-growth metropolitan markets.
- Positive gearing: Cash flow positive from day one, taxable income (not a loss). Better if income is the priority or you can't absorb ongoing losses.
Neither is universally better — the right choice depends on your income, goals, and the specific property. See: Positive vs Negative Gearing: Which Strategy Is Better? (coming soon)
Depreciation: The Non-Cash Deduction That Boosts Negative Gearing
One often-overlooked component of negative gearing is depreciation. The ATO allows property investors to claim depreciation on:
- Division 43 (building allowance): The structural component of a building — claimable at 2.5% per year on properties built after 1987
- Division 40 (plant and equipment): Fixtures and fittings — carpets, blinds, appliances, air conditioning — each depreciated over their effective life
On a new property, depreciation can add $5,000–$15,000+ in deductions each year — without you actually spending that money. A quantity surveyor produces a depreciation schedule (cost: ~$600–$800 one-off) that you provide to your accountant each year. The deduction compounds the negative gearing benefit significantly.
Capital Gains Tax and the 50% Discount
When you eventually sell an investment property that has grown in value, you pay Capital Gains Tax (CGT) on the profit. In Australia, if you've held the property for more than 12 months, a 50% CGT discount applies — meaning you only pay tax on half the capital gain.
This CGT discount is why negative gearing makes strategic sense for patient investors: the annual tax savings reduce your holding cost, and when you sell, you only pay tax on 50% of the gain. The combined effect — annual tax saving + discounted CGT on exit — is what makes the strategy attractive.
Risks of Negative Gearing
- No capital growth: If the property doesn't grow, you've been losing money for years with nothing to offset it
- Vacancy: No rental income = full cash outflow from your own pocket
- Interest rate rises: A 1% rate rise on a $650K loan is $6,500/year more in costs
- Policy risk: Negative gearing has been politically debated — though it remains intact in 2026
- Borrowing capacity impact: Investment debt reduces your capacity to borrow for future purchases
At Mortgagefy, we help investors in Western and Southwest Sydney assess investment loan options and model the cash flow picture before committing. We compare investment loans across 30+ lenders and work with your accountant or tax advisor to ensure the structure is right. See also: Investment Property Loans | Interest-Only Investment Loans.
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