Negative Gearing Explained Simply

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Negative gearing is one of Australia’s most politically charged tax policies and one of the most misunderstood. It comes up in every election cycle, gets blamed for unaffordable housing by some and defended as essential for rental supply by others. Here’s what it actually is, how it works mathematically, and whether it makes sense for your situation.

The Simple Definition

Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates. The resulting loss can be offset against your other income — typically your salary — to reduce your taxable income.

Example:

• Annual rental income: $26,000 ($500/week)
• Annual costs (mortgage interest, rates, insurance, maintenance, management fees, depreciation): $42,000
• Net loss: $16,000
• If you’re on a $120,000 salary (32.5% marginal rate), this loss saves you: $5,200 in tax

You’re still losing $10,800 in real money ($16,000 loss minus $5,200 tax saving). Negative gearing doesn’t make a loss profitable — it reduces the after-tax cost of the loss.

Why Would Anyone Deliberately Lose Money?

The bet is capital growth. Negative gearing makes sense if you believe the property will appreciate in value enough to offset the accumulated losses over time. In Australia’s historically strong property market, this has often worked out. But it’s a capital growth play, not an income play.

A 2024 analysis by the Grattan Institute found that negative gearing, combined with the 50% capital gains tax discount for assets held over 12 months, effectively means high-income investors are subsidised by lower-income taxpayers to speculate on capital growth. This is the political argument against it. The property industry’s counterargument is that negative gearing incentivises investors to provide rental supply — though the Grattan Institute found most investor purchases are existing properties, not new builds, so the supply argument has limited support in the evidence.

The Numbers: When Negative Gearing Works

Negative gearing works financially when:

1. You’re in a high tax bracket: The tax saving scales with your marginal rate. At 45% (income over $180,000), a $16,000 loss saves $7,200 — more than double the saving compared to the 32.5% bracket example above.
2. The property achieves strong capital growth: At 7% annual growth, a $600,000 property becomes $1,180,000 in 10 years. That $580,000 gain (less CGT) can more than offset accumulated annual losses.
3. Interest rates are manageable: Post-2022 rate rises have made negative gearing significantly less favourable. At 6.5% interest, more of your mortgage cost is non-deductible principal repayment. The real deductible interest portion is higher, but the cash flow strain is severe.

Deductible Expenses: What You Can Actually Claim

The ATO allows deductions on:

• Mortgage interest (not principal repayments)
• Council rates and water charges
• Property management fees (typically 7–10% of rent)
• Landlord insurance
• Repairs and maintenance (immediate deduction)
• Depreciation on the building and fixtures (via a tax depreciation schedule)
• Borrowing costs (spread over 5 years)
• Accounting and legal fees related to the property

Depreciation is often overlooked. A $600,000 investment property purchased new could generate $10,000–$18,000 per year in depreciation deductions for the first few years, significantly boosting your paper loss and tax saving without any actual cash outlay.

Risks

• Policy risk: Labor governments have discussed quarantining negative gearing to new builds only. If policy changes while you hold a property, your investment thesis changes.
• Capital growth risk: Not all markets grow at 7% p.a. Darwin, regional NT, and some outer-suburb markets have delivered flat or negative returns over 10+ years.
• Cash flow risk: Vacancy periods, unexpected repairs, or rate rises can make the ongoing cash bleed unsustainable.
• Leverage risk: Most property investment involves significant debt. Rising rates amplify your losses.

The Bottom Line

Negative gearing is a tax strategy, not a property strategy. The tax saving is real but modest — it reduces the cost of a loss; it doesn’t eliminate it. The actual money is made (or lost) on capital growth. It makes the most mathematical sense for high-income earners in strong-growth property markets with a long holding horizon. For lower-income investors, or anyone buying in a market without strong capital growth prospects, the tax saving is small and the downside risk is real.

Understand the numbers before you buy. A tax accountant who specialises in property investment is worth the consultation fee before you commit to a strategy that locks up hundreds of thousands of dollars for a decade.

This article is general information only and not financial or tax advice. Consult a qualified accountant or financial adviser before making investment decisions.