What Is Negative Gearing?
Negative gearing is one of the most discussed - and debated - concepts in Australian property investing. In simple terms, an investment property is negatively geared when the costs of owning it exceed the rental income it generates. The resulting loss can be deducted from your other income (such as your salary), reducing the amount of tax you pay.
It's a strategy that relies on the expectation that long-term capital growth will more than compensate for short-term rental losses. But it's not without risk, and understanding how it works is essential before committing to an investment property.
This guide explains how negative gearing works in practice, what costs are deductible, who benefits most, and the risks you should be aware of. If you're exploring investment property financing, our investment property loan guide covers the lending side in detail.
How Negative Gearing Works: A Simple Example
The easiest way to understand negative gearing is through numbers. Here's an illustrative example - not a guarantee of typical returns.
Note: The figures below are for illustration only. Actual costs, rental income, and tax outcomes will vary depending on your property, loan, and personal circumstances.
| Item | Annual Amount |
|---|---|
| Rental income | $25,000 |
| Loan interest | −$22,000 |
| Council rates | −$2,000 |
| Insurance | −$1,500 |
| Property management fees | −$2,000 |
| Repairs & maintenance | −$1,500 |
| Other costs (water, body corporate, etc.) | −$1,000 |
| Total costs | −$30,000 |
| Net rental loss | −$5,000 |
In this example, the property generates a $5,000 annual loss. Under negative gearing, you can deduct that $5,000 from your other taxable income.
If your marginal tax rate is 37%, the tax saving would be:
$5,000 × 37% = $1,850 tax reduction
This means the property costs you $5,000 in pre-tax losses, but the actual out-of-pocket impact is reduced to $3,150 after the tax benefit. The investor is essentially hoping the property's value increases over time to make the overall investment profitable.
What Costs Can You Deduct?
The ATO allows a range of deductions for rental property expenses. These broadly fall into two categories: immediate deductions and capital works deductions.
Immediate Deductions
These are costs you can claim in full in the income year they are incurred:
- Loan interest - interest on the loan used to purchase the property (not principal repayments)
- Council rates - local government rates
- Water charges - usage and service fees
- Body corporate fees - if the property is a unit or apartment
- Landlord insurance - building, contents, and landlord liability
- Property management fees - agent commissions and letting fees
- Repairs and maintenance - restoring something to its original condition (not improvements)
- Pest control - regular pest inspections and treatment
- Cleaning and gardening - if paid for by the landlord
- Legal fees - related to tenancy disputes or lease preparation
- Travel - no longer deductible for residential property inspections (since 1 July 2017)
Capital Works Deductions (Depreciation)
Some costs are deducted over multiple years rather than immediately. See the depreciation section below for detail.
Important: You can only claim deductions for the period your property is rented out or genuinely available for rent. Private use periods are not deductible. See the ATO's rental properties guide for full details.
Negative vs Positive vs Neutral Gearing
Gearing simply refers to the relationship between your investment income and costs. Here's how the three types compare:
| Type | What It Means | Cash Flow | Tax Impact | Best When |
|---|---|---|---|---|
| Negative gearing | Costs exceed rental income | Negative - you top up each year | Loss reduces taxable income | You expect strong capital growth and have a high marginal tax rate |
| Neutral gearing | Costs roughly equal rental income | Break-even | Minimal tax impact | You want a self-funding property with growth upside |
| Positive gearing | Rental income exceeds costs | Positive - generates cash flow | Profit added to taxable income | You prioritise income over growth, or are on a lower tax rate |
There's no universally "best" gearing position - it depends on your income, goals, risk tolerance, and the specific property. Many investors start negatively geared and shift towards neutral or positive gearing over time as rents increase and, if on a fixed rate, when they refinance to a lower variable rate. See our guide on fixed vs variable home loans for more on rate types.
The Capital Gains Tax (CGT) Connection
Negative gearing and capital gains tax (CGT) are closely linked. The core strategy behind negative gearing is to accept short-term rental losses in exchange for long-term capital growth - and the tax treatment of that growth matters significantly.
How CGT Works on Investment Property
When you sell an investment property for more than you paid (including purchase costs), the profit is a capital gain. This gain is added to your taxable income in the year of sale.
The 50% CGT Discount
If you are an individual (not a company) and have held the property for at least 12 months, you are entitled to a 50% CGT discount. This means only half of your capital gain is added to your taxable income.
Illustrative example:
| Item | Amount |
|---|---|
| Sale price | $700,000 |
| Purchase price (incl. costs) | $550,000 |
| Capital gain | $150,000 |
| 50% CGT discount | −$75,000 |
| Taxable capital gain | $75,000 |
The $75,000 taxable gain would then be added to your other income and taxed at your marginal rate.
Caution: Capital growth is not guaranteed. Property values can fall, and if you sell at a loss after years of negative gearing, you may end up significantly worse off. A capital loss can only be offset against capital gains - not against your salary or other income.
Who Benefits Most From Negative Gearing?
The tax benefit of negative gearing is directly proportional to your marginal tax rate. The higher your rate, the greater the tax saving on each dollar of rental loss.
Using the 2025–26 Australian resident tax brackets (excluding the 2% Medicare levy):
| Taxable Income Range | Marginal Rate | Tax Saving on $5,000 Loss |
|---|---|---|
| $18,201 – $45,000 | 16% | $800 |
| $45,001 – $135,000 | 30% | $1,500 |
| $135,001 – $190,000 | 37% | $1,850 |
| $190,001 and over | 45% | $2,250 |
An investor earning $200,000 saves $2,250 in tax on the same $5,000 loss that saves a $60,000 earner just $1,500. This is why negative gearing is often described as disproportionately benefiting higher-income earners.
Note: The Medicare levy of 2% applies on top of these rates, which slightly increases the effective tax saving. The table above uses the base marginal rates from the ATO for the 2025–26 financial year.
Risks of Negative Gearing
Negative gearing is not a risk-free strategy. You are deliberately losing money each year on the expectation of future capital growth - and that growth is never guaranteed.
Key Risks to Consider
- Cash flow pressure - You need to fund the gap between rent and costs from your own pocket every month. If your circumstances change (job loss, illness), this shortfall can become a serious burden.
- Interest rate risk - If the RBA cash rate (currently 3.85%) rises, your loan repayments increase, widening the gap. For current home loan rates, see our best home loan rates comparison.
- Vacancy risk - Periods without a tenant mean zero income but ongoing costs. Extended vacancies can turn a manageable loss into a significant one.
- Maintenance and unexpected costs - Major repairs (roof, plumbing, structural) can cost tens of thousands of dollars and are difficult to predict.
- Capital loss - Property values do fall. If you sell for less than you paid, you've lost money on rent and on the sale. Capital losses can only offset capital gains, not salary income.
- Opportunity cost - Money tied up in a negatively geared property could have been invested elsewhere (shares, superannuation, a positively geared property) with potentially better returns.
The bottom line: You're betting the property value increases enough over time to offset years of rental losses, transaction costs (stamp duty, legal fees, agent commissions), and the opportunity cost of your capital.
Property Depreciation: A Hidden Tax Benefit
Depreciation is one of the most valuable - and most overlooked - deductions available to property investors. It's a "non-cash" deduction, meaning you claim it without spending any additional money.
Building (Capital Works) Depreciation
For residential properties built after 15 September 1987, you can claim a deduction of 2.5% of the original construction cost per year for 40 years.
Example: If a property's construction cost was $300,000, the annual building depreciation deduction would be $7,500 ($300,000 × 2.5%).
Plant and Equipment (Fixtures and Fittings)
Items such as carpets, blinds, hot water systems, air conditioners, and appliances can also be depreciated. Each item has an effective life determined by the ATO, and is depreciated accordingly using either the prime cost or diminishing value method.
Important: Since 1 July 2017, investors who purchase second-hand residential properties can no longer claim plant and equipment depreciation on existing fixtures - only on new items they install. Building (capital works) deductions are not affected by this change.
Getting a Depreciation Schedule
A quantity surveyor (also called a tax depreciation specialist) can inspect your property and prepare a depreciation schedule. This document outlines all claimable deductions over the life of the property. The cost of the schedule itself is tax-deductible.
A good depreciation schedule can add thousands of dollars in annual deductions, significantly improving the after-tax cash flow of a negatively geared property.
Loan Structuring for Investment Properties
How you structure your home loan matters - especially if you also have an owner-occupied home loan.
Keep Loans Separate
Never mix investment and personal borrowing. If you have both an owner-occupied mortgage and an investment loan, keep them as separate loan accounts with separate offset accounts. This ensures the ATO can clearly identify which interest payments are deductible (investment) and which are not (personal).
If you cross-collateralise or use a single redraw facility across both loans, you risk "tainting" the deductibility of your investment interest - a costly mistake that's difficult to unwind.
Interest-Only vs Principal and Interest
Many negatively geared investors choose interest-only repayments on the investment loan. This maximises the tax-deductible interest while directing any spare cash to pay down the non-deductible owner-occupied loan faster. See our comparison of principal & interest vs interest-only for a detailed breakdown.
An offset account on your owner-occupied loan is generally more tax-effective than a redraw facility when you also have an investment loan.
For a complete guide to structuring investment loans, including LVR requirements and lender options, see our investment property loan guide.
The Political Debate Around Negative Gearing
Negative gearing is one of Australia's most politically charged tax policies. It's worth understanding both sides of the debate, as any policy changes could affect property investors.
Critics Argue
- Negative gearing inflates property prices by encouraging speculative buying, making housing less affordable for owner-occupiers and first home buyers.
- The tax benefits disproportionately favour higher-income earners, who save more per dollar of loss due to higher marginal tax rates.
- It encourages investment in existing housing rather than new supply, which does little to address housing shortages.
Supporters Argue
- Negative gearing is a standard business principle - any enterprise can deduct legitimate expenses from income.
- Removing negative gearing could reduce rental supply, putting upward pressure on rents.
- Investors take on genuine financial risk and provide housing that the government does not build.
Australia's Unique Position
Australia is notable for allowing unlimited negative gearing against all forms of income, including salary and wages. Many countries restrict loss deductions to investment income only (known as "ring-fencing"). This makes Australia's treatment unusually generous by global standards.
Note: This guide presents both sides of the debate for informational purposes. RatePilot does not take a political position on negative gearing policy. Any future policy changes will be reported as they are announced.
How to Read a Comparison Rate on an Investment Loan
When shopping for an investment loan, always check the comparison rate - not just the advertised interest rate. The comparison rate includes most fees and charges over the life of the loan, giving you a more accurate picture of the true cost. Our guide on how to read a comparison rate explains what's included (and what isn't).
Your credit score also plays a role in the rates you're offered. Before applying, check where you stand and take steps to improve your score if needed.
Browse current investment loan rates on our home loans comparison page.
Key Takeaways
- Negative gearing means your investment property costs exceed rental income - the loss is tax-deductible against your other income.
- The tax benefit scales with your marginal rate - higher earners save more per dollar of loss.
- The strategy relies on capital growth to deliver an overall profit, but growth is never guaranteed.
- Depreciation (building and fixtures) can significantly increase deductions without additional cash outlay.
- Keep investment and personal loans strictly separate for clean tax deductibility.
- Consider the risks - cash flow pressure, rate rises, vacancies, and the possibility of selling at a loss.
- Seek professional advice - a qualified tax accountant and financial adviser can help you determine whether negative gearing suits your situation.
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