Negative Gearing Explained in Plain English
20 May 2026
What Negative Gearing Actually Means
A property is negatively geared when the costs of owning it exceed the income it generates. If your investment property earns $28,000 in annual rent but your interest payments, council rates, insurance, property management fees, and maintenance total $38,000, you are running a $10,000 annual loss on that property.
Under Australian tax law, that $10,000 loss can be offset against other income — typically salary or wages — which reduces the amount of tax you pay for that financial year. This is the tax treatment that makes negative gearing attractive to many investors. The ATO allows deductible expenses on investment properties to reduce taxable income, and when those expenses exceed rental income, the shortfall offsets income from other sources.
Positive gearing works the opposite way: the property generates more income than it costs to hold, producing taxable profit. Neutral gearing sits in between, where income and costs are roughly equal.
Which Expenses Are Deductible?
Not every property cost qualifies as an immediate deduction. Expenses that are deductible in the year they occur include loan interest, property management fees, council rates, water charges, landlord insurance, repairs and maintenance, advertising for tenants, and accounting fees related to the property.
Capital expenses — costs that improve the property rather than maintain it — are treated differently. They are depreciated over time through the building works allowance or as part of a depreciation schedule for plant and equipment (items like appliances, carpets, and hot water systems). A quantity surveyor can prepare a depreciation schedule that may uncover deductions investors didn't know they had, which can meaningfully change the effective cash flow position of a property.
Loan repayments — the principal component — are not deductible. Only the interest portion of a mortgage payment qualifies. This is why many investors hold interest-only loans on investment properties during the accumulation phase, though this carries its own risks and trade-offs that are worth discussing with a financial adviser.
The Capital Growth Assumption
Negative gearing only makes financial sense if the property grows in value over time. The tax savings from the annual loss do not, on their own, offset years of cash flow shortfalls. The strategy rests on the assumption that capital growth will eventually produce a gain that exceeds the accumulated losses and holding costs — and that the capital gain will be taxed at a discounted rate.
For assets held longer than 12 months, individuals receive a 50% discount on capital gains tax. So if an investor in the 37% tax bracket sells a property that has grown by $300,000 after 10 years of ownership, they pay tax on $150,000 of that gain rather than the full amount. This discounted treatment of capital gains is a significant part of why the strategy has historically appealed to higher-income earners.
For an investor on a 37% marginal tax rate, that $12,000 loss reduces their tax bill by approximately $4,440 — meaning the real out-of-pocket cost is closer to $7,560 per year, not $12,000.
Whether that cost is worth it depends on the rate of capital growth achieved over the holding period.
Who Does It Suit and Who Does It Not?
Negative gearing tends to work more effectively for investors with higher taxable income, because the tax benefit of offsetting losses is larger at higher marginal rates. An investor on a 47% rate (including the Medicare levy) receives a greater tax saving per dollar of loss than one on a 19% rate.
It requires the investor to fund the cash flow shortfall from other income — which means stable, sufficient earnings are important. Someone with variable or uncertain income who cannot comfortably absorb the annual holding cost shortfall faces real financial pressure if the property takes longer than expected to appreciate, rates rise, or it sits vacant for an extended period.
Investors who need income from their portfolio — such as those approaching retirement — often find positively geared properties more appropriate, since the emphasis shifts from tax minimisation to cash flow. The right structure depends on the investor's income, tax position, timeline, and overall financial goals. This is a decision worth working through with both a mortgage broker and a qualified accountant, as the tax implications vary significantly based on personal circumstances.
What Negative Gearing Does Not Protect Against
The tax benefit only applies while there is other taxable income to offset. If an investor leaves the workforce, reduces their hours, or their income falls significantly, the deductible loss may no longer produce the same tax saving. The property still generates the shortfall — it just isn't offsetting as much tax.
Vacancy periods, rising interest rates, and unexpected capital expenses can all widen the gap between rental income and holding costs. A property purchased with a 0.5% annual shortfall can become significantly more expensive to hold if rates rise 150 basis points or a major repair is needed. Stress-testing assumptions before purchasing is essential, not optional.
Key Takeaways
- A negatively geared property costs more to hold than it earns in rent — the annual loss is deductible against other taxable income, reducing your tax bill.
- The strategy depends on capital growth over time to produce a net gain. Tax savings alone do not make the holding costs worthwhile.
- Assets held more than 12 months attract a 50% CGT discount, which is a core part of the strategy's long-term return calculation.
- Higher-income earners benefit more from negative gearing because the tax saving per dollar of loss is larger at higher marginal rates.
- Stable income is important — the shortfall between rent and costs must be funded from other sources each year.
- Tax treatment, deductibility of expenses, and the right loan structure depend on personal circumstances. Specialist advice from an accountant and financial adviser is essential before committing to this approach.
