Negative Gearing Explained: How It Works for Australian Property Investors

Negative gearing is one of the most discussed — and misunderstood — tax strategies in Australian property investment. It allows investors to deduct rental property losses from their other income, reducing their overall tax bill. But it's not a guaranteed path to wealth, and getting it wrong can be expensive.

This guide explains exactly how negative gearing works, when it makes sense, and the risks you need to understand.

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What Is Negative Gearing?

A property is negatively geared when the costs of owning it (mortgage interest, maintenance, insurance, council rates, etc.) exceed the rental income it generates. The resulting loss can be offset against your other income — typically your salary — reducing your taxable income and therefore your tax bill.

Simple Example

Item	Annual Amount
Rental income	$28,000
Mortgage interest	-$30,000
Council rates	-$2,000
Insurance	-$1,500
Property management	-$2,200
Maintenance	-$1,500
Depreciation	-$4,000
Total expenses	-$41,200
Net loss	-$13,200

If you earn $120,000 salary and have a $13,200 rental loss, your taxable income becomes $106,800. At the 37% marginal tax rate (for income $120,001–$180,000), you save approximately $4,884 in tax.

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How Negative Gearing Reduces Your Tax

The tax saving depends on your marginal tax rate:

Taxable Income (2025–26)	Marginal Rate	Tax Saving per $10,000 Loss
$18,201–$45,000	16%	$1,600
$45,001–$135,000	30%	$3,000
$135,001–$190,000	37%	$3,700
$190,001+	45%	$4,500

Key insight: Negative gearing provides bigger tax benefits to higher income earners. Someone earning $200,000 saves 45 cents for every dollar of rental loss, while someone earning $60,000 saves only 30 cents.

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The Three Types of Gearing

Negative Gearing

• Expenses > Income
• You make a cash loss each year
• Tax deduction reduces the loss
• Strategy relies on capital growth to generate overall returns

Neutral Gearing

• Expenses ≈ Income
• Property roughly breaks even
• Minimal tax impact
• Often the transition point as rents rise over time

Positive Gearing

• Income > Expenses
• The property generates a cash profit
• You pay tax on the profit
• Common with low-LVR properties or high-rental-yield areas

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What Expenses Can You Deduct?

The ATO allows deductions for expenses incurred in earning rental income:

Immediately Deductible

• Mortgage interest (not principal repayments)
• Property management fees
• Council rates and water rates
• Insurance (landlord, building, contents)
• Repairs and maintenance (not improvements)
• Advertising for tenants
• Body corporate fees
• Pest control
• Land tax
• Travel to inspect the property (limited)

Claimed Over Time (Depreciation)

• Building depreciation (Division 43): For properties built after 1985, you can claim 2.5% of the construction cost per year for 40 years
• Plant and equipment (Division 40): Items like carpets, blinds, hot water systems, air conditioning — depreciated over their effective life

NOT Deductible

• Purchase costs (stamp duty, legal fees at purchase) — these are added to the cost base for CGT purposes
• Principal loan repayments
• Your own labour on repairs
• Private use of the property

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Depreciation: The Hidden Tax Deduction

Depreciation is a non-cash deduction — you claim a loss without actually spending money. For newer properties, depreciation can add $5,000–$15,000 per year in deductions.

Example — New apartment purchased for $600,000:

Depreciation Type	Year 1 Deduction
Building (Division 43): 2.5% of $350,000 construction	$8,750
Plant & equipment (Division 40)	$4,000–$6,000
Total depreciation	$12,750–$14,750

A quantity surveyor's report (tax depreciation schedule) costs $400–$800 and is itself tax-deductible. It identifies all claimable items and their depreciation rates.

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When Does Negative Gearing Make Sense?

Good Candidates for Negative Gearing

1. High income earners (37% or 45% tax bracket) — larger tax savings
2. Properties in high-growth areas — capital growth is essential to justify the annual loss
3. Newer properties — higher depreciation deductions
4. Long-term investors (7+ year horizon) — capital growth compounds over time
5. Investors with stable employment — you need reliable income to fund the shortfall

When It Doesn't Make Sense

1. Low income earners — the tax benefit is smaller and the cash shortfall harder to fund
2. Properties with low capital growth prospects — negative gearing without growth is just losing money
3. If you can't afford the shortfall — even after the tax deduction, you're paying out of pocket each week
4. Short-term holds — capital gains tax and transaction costs eat into returns

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The Real Cost of Negative Gearing

Many investors focus on the tax saving but forget the actual cash outlay:

Annual rental loss	Tax saving (37% bracket)	Net annual cost
$10,000	$3,700	$6,300
$15,000	$5,550	$9,450
$20,000	$7,400	$12,600

You're still out of pocket. The strategy only works if capital growth exceeds your cumulative net costs over time.

Example over 10 years:

• Net annual cost: $9,450 × 10 years = $94,500 total out of pocket
• Required capital growth to break even: at least $94,500 + transaction costs
• On a $600,000 property, that's about 16% growth over 10 years (1.5% p.a.)
• If the property grows by 4% p.a. (historical average), you'd have ~$288,000 in capital growth — well ahead

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Capital Gains Tax (CGT) Implications

When you eventually sell a negatively geared property:

• The capital gain is assessable — added to your income in the year of sale
• 50% CGT discount applies if you've held the property for more than 12 months
• Cost base includes purchase price + stamp duty + legal fees + capital improvements

Example:

• Bought for $600,000, sold for $850,000 after 10 years
• Capital gain: $250,000
• After 50% discount: $125,000 added to taxable income
• Tax on $125,000 at 37%: approximately $46,250

This is why timing the sale and understanding your tax position in the year of sale matters.

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Negative Gearing vs Positive Gearing

Factor	Negative Gearing	Positive Gearing
Cash flow	Negative — costs money each year	Positive — generates income
Tax impact	Reduces taxable income	Increases taxable income
Growth strategy	Relies on capital growth	Income-focused
Risk	Higher — depends on growth	Lower — self-funding
Best for	High-income earners, growth areas	Retirees, low-risk investors
Typical property	Inner city, newer builds	Regional, high-yield areas

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Key Takeaways

1. Negative gearing means your property expenses exceed rental income — the loss is tax-deductible
2. The tax saving depends on your marginal rate — higher income = bigger benefit
3. Depreciation is a powerful non-cash deduction, especially for newer properties
4. Negative gearing only works if capital growth exceeds your net annual costs over time
5. Get a quantity surveyor's report — it typically pays for itself many times over
6. Consider your cash flow — even with tax benefits, you'll be out of pocket each year
7. Always consult a tax professional — the ATO scrutinises rental deductions closely

Use CREDIGO's free property investment calculator to model rental yield, cash flow, and capital growth scenarios for any property.

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CREDIGO provides general information only. This is not financial, tax, or investment advice. Consult a licensed financial adviser, tax professional, or buyer's agent before making property investment decisions.