Negative Gearing Explained: How It Works for Property Investors in Australia

Negative gearing is one of the most discussed — and most misunderstood — concepts in Australian property investment. Used correctly, it can significantly reduce your after-tax holding costs and accelerate wealth building. Used incorrectly, it can lead to poor investment decisions. This guide explains how it works, who benefits, and how to think about it as part of a broader strategy.

What Is Negative Gearing?

Negative gearing occurs when the total costs of owning an investment property exceed the rental income it generates. The “loss” is deducted against your other taxable income — typically your salary — reducing your overall tax bill.

For example, if your investment property generates $26,000 in annual rent but costs you $35,000 in mortgage interest, rates, insurance, management fees, and depreciation, you have a $9,000 loss. If your marginal tax rate is 32.5%, that loss reduces your tax by $2,925. Your actual out-of-pocket cost is reduced by that amount.

How Negative Gearing Works — Step by Step

Here is a simplified example:

• Annual rental income: $26,000 ($500/week)
• Mortgage interest: $33,800 (6.5% on $520,000 loan)
• Council and water rates: $2,700
• Insurance: $1,500
• Property management: $2,210 (8.5% of rent)
• Maintenance: $1,500
• Depreciation: $8,000 (non-cash deduction)

Total deductions: $49,710
Taxable property income: $26,000 − $49,710 = −$23,710
Tax benefit at 32.5%: $23,710 × 0.325 = $7,706

That $7,706 comes back to you as a tax refund (or reduced tax withholding if you apply for a PAYG variation). It significantly reduces the true cost of holding the property.

The Role of Depreciation

Depreciation is the secret weapon of negative gearing. It is a non-cash deduction — meaning you claim a tax benefit without actually spending any money. The ATO allows you to claim depreciation on:

• Division 43 (building structure) — 2.5% per year for buildings constructed after September 1987
• Division 40 (plant and equipment) — Items like carpets, blinds, hot water systems, and air conditioning, depreciated over their effective life

Newer properties offer higher depreciation deductions. A qualified quantity surveyor prepares a depreciation schedule that maximises your legitimate claims.

Negative Gearing vs Positive Gearing

A negatively geared property costs you money to hold — expenses exceed income. You receive a tax benefit on the loss.
A positively geared property puts money in your pocket — income exceeds expenses. You pay tax on the profit.

Neither is inherently better. The right approach depends on your income, tax position, and investment strategy. Many investors start negatively geared and transition to positive gearing as rents increase over time — a natural progression that improves cash flow while maintaining the growth benefits of the original purchase.

Who Benefits Most from Negative Gearing?

The tax benefit of negative gearing is proportional to your marginal tax rate:

• 19% bracket ($18,201–$45,000): Modest benefit
• 32.5% bracket ($45,001–$120,000): Meaningful benefit
• 37% bracket ($120,001–$180,000): Strong benefit
• 45% bracket ($180,001+): Maximum benefit

The higher your tax rate, the more valuable each dollar of deduction becomes. However, negative gearing should never be the primary reason to buy a property. The investment must make sense on its own merits — growth potential, rental demand, location quality — with negative gearing as a supporting benefit, not the main driver.

Common Mistakes with Negative Gearing

• Buying for tax benefits alone — A property that loses money and doesn't grow is just a loss, regardless of the tax deduction
• Ignoring cash flow sustainability — The tax benefit reduces the cost but doesn't eliminate it. You still need to fund the shortfall
• Not getting a depreciation schedule — Many investors miss thousands in legitimate depreciation claims because they don't engage a quantity surveyor
• Forgetting that negative gearing is temporary — As rents rise, most properties transition to positive gearing over time

Frequently Asked Questions

What is negative gearing?

Negative gearing occurs when the costs of owning an investment property exceed the rental income. The loss reduces your taxable income, creating a tax benefit.

Can I claim depreciation on an investment property?

Yes. You can claim depreciation on the building structure and on fixtures and fittings. A qualified quantity surveyor prepares the depreciation schedule.

Is negative gearing being abolished?

As of August 2026, there are no confirmed plans to abolish negative gearing. It remains a legitimate tax strategy for property investors in Australia.

Should I buy a negatively geared or positively geared property?

It depends on your strategy. Negatively geared properties often offer stronger growth potential. Positively geared properties offer better cash flow. Many investors use a blend of both in their portfolio.