Few topics generate more debate in Australian property circles than negative gearing. It is simultaneously one of the country's most widely used investment strategies and one of its most politically contested tax provisions. For many investors, it is central to their property portfolio. For others, it is a concept surrounded by confusion -- often misunderstood as a government handout rather than the straightforward tax offset it actually is.
This guide explains exactly what negative gearing is, how it works mechanically, who benefits most, what the genuine risks are, and how to decide whether it belongs in your investment strategy.
1 What Negative Gearing Is -- and What It Is Not
Negative gearing occurs when the costs of owning and financing an investment property exceed the rental income it generates. The resulting net loss can be offset against your other taxable income -- typically your salary or wages -- thereby reducing your overall tax bill.
The word "gearing" refers to borrowing money to invest. A property is positively geared when rental income exceeds all holding costs, producing a net profit from day one. It is negatively geared when costs exceed rental income, producing a net loss. It is neutrally geared when income and costs are roughly equal.
Importantly, negative gearing is not a special concession invented for property investors. It is simply the application of the ordinary income tax principle that a loss from one income-producing activity can be offset against income from another. The same principle applies to shares, managed funds, and any other income-producing investment. Property has attracted the most attention because it is the asset class most Australians invest in outside of superannuation.
2 How the Tax Deduction Is Calculated
The mechanics of negative gearing are straightforward. You add up all the income your investment property generates -- primarily rental income -- and subtract all the allowable deductions. If the result is a loss, that loss reduces your taxable income from all sources.
A worked example using 2025-26 figures illustrates this clearly. Suppose you own an investment property in Brisbane that earns $28,000 per year in rent. Your total deductible expenses for the year are $42,000 -- made up of mortgage interest, depreciation, property management fees, council rates, insurance, and repairs. Your net rental loss is $14,000.
If your salary is $130,000 per year, your taxable income without the property is $130,000. With the negative gearing loss applied, your taxable income falls to $116,000. Using 2025-26 tax rates, the difference in tax payable at this income level is approximately $4,900 (the $14,000 loss is reduced at the marginal rate of 37 cents in the dollar, plus the 2% Medicare levy). That is a real cash saving -- though not a profit. You still paid $14,000 more in expenses than you earned in rent; you simply recovered $4,900 of that through lower tax.
Negative gearing reduces your tax bill. It does not eliminate your loss. The strategy only makes financial sense if the property appreciates in value by more than the accumulated holding losses over time.
3 Key Deductible Expenses
Understanding which costs are deductible is essential to accurately calculating your net rental position. The Australian Taxation Office (ATO) allows the following categories of deduction for investment properties:
- Mortgage interest. The interest component of your investment loan repayments is fully deductible. This is typically the largest single expense for a negatively geared property. Note that only the interest is deductible, not the principal repayment.
- Depreciation. This is a non-cash deduction representing the decline in value of the building structure (Division 43 capital works deduction) and the plant and equipment within it (Division 40 depreciation). Depreciation can significantly increase the size of a paper loss without any additional cash outflow.
- Property management fees. The fees paid to a licensed property manager -- typically 7% to 10% of gross rent -- are fully deductible, as are letting fees, lease renewal fees, and advertising costs incurred to find tenants.
- Repairs and maintenance. The cost of maintaining the property in its existing condition is deductible. This includes plumbing repairs, repainting, fixing appliances, and general upkeep. Note that improvements and renovations are treated differently -- they are capital expenditure and depreciated over time rather than claimed immediately.
- Insurance. Landlord insurance, building insurance, and contents insurance for fixtures and fittings are all deductible.
- Council rates and water charges. Rates levied by the local council, as well as water and sewerage charges paid by the owner, are deductible.
- Land tax. Where applicable, land tax paid on an investment property is deductible.
- Strata levies. For apartment and townhouse owners, regular strata levies (but not special levies for capital improvements) are deductible.
- Accounting and legal fees. Fees paid to an accountant to prepare your rental schedule or a solicitor to manage tenancy matters are deductible.
- Loan costs. Some loan establishment costs, lenders mortgage insurance (where applicable), and bank charges can be deducted over the life of the loan.
Costs that are not immediately deductible include stamp duty on acquisition, the purchase price itself, and capital improvement expenditure. These may affect your capital gains tax calculation when you eventually sell, but they cannot be offset against rental income year by year.
4 Negative Gearing vs Positive Gearing: The Core Difference
The choice between a negatively geared and positively geared investment property is ultimately a choice about the trade-off between cash flow and capital growth.
Positively geared properties -- where rental income exceeds all expenses from the outset -- generate taxable income rather than a deductible loss. This improves your day-to-day cash flow but creates an additional tax obligation. Positive cash flow properties are more commonly found in regional markets, mining towns, or higher-yielding property types such as dual-income dwellings, granny flat setups, or commercial property. They suit investors who need the portfolio to support itself without drawing on personal income.
Negatively geared properties typically involve higher-value assets in capital city or coastal markets, where strong long-term capital growth is the primary return driver. The investor accepts ongoing cash flow shortfalls in exchange for anticipated appreciation. This model works well for investors with high incomes who can comfortably absorb the cash flow shortfall and benefit most from the tax offset.
Neither approach is inherently superior. The right strategy depends on your income, tax position, risk tolerance, time horizon, and the specific property and market in question.
5 Who Benefits Most From Negative Gearing
The tax benefit of negative gearing scales directly with your marginal tax rate. Under Australia's 2025-26 individual tax brackets:
- Taxable income $0 -- $18,200: 0% (tax-free threshold)
- Taxable income $18,201 -- $45,000: 19 cents per dollar
- Taxable income $45,001 -- $135,000: 32.5 cents per dollar
- Taxable income $135,001 -- $190,000: 37 cents per dollar
- Taxable income above $190,000: 45 cents per dollar
The Medicare levy of 2% applies on top of these rates for most taxpayers. A $10,000 rental loss is worth only $1,900 in tax savings to someone on the 19% rate, but $4,700 to someone on the 45% rate (plus Medicare levy). This is why negative gearing is most financially effective for high-income earners -- lawyers, doctors, executives, and business owners earning above $135,000 per year receive proportionally much greater tax relief from the same rental loss.
This reality has been central to the political debate about negative gearing's fairness. Critics argue the strategy disproportionately benefits wealthy investors. Proponents argue the strategy is available to anyone and that the tax benefit merely compensates for genuine economic losses being incurred in the provision of rental housing.
6 The Policy Debate: 2016, 2019, and Beyond
Negative gearing has been one of the most contested issues in Australian economic policy debate for over a decade. The most significant challenge came in 2016, when the Labor Party under Bill Shorten announced a policy to limit negative gearing to new residential properties, with existing investments grandfathered. Labor also proposed reducing the capital gains tax discount from 50% to 25% for assets held longer than 12 months.
The policy was taken to the 2016 election and again to the 2019 election, where it became a defining issue. Labor's defeat in May 2019 -- widely referred to in media commentary as the "unlosable election" -- was partly attributed to concerns about the property policy's impact on existing investors and on housing values more broadly. Following that defeat, Labor largely stepped back from the negative gearing reform agenda.
The 2019 election outcome effectively settled the negative gearing debate for the medium term. The Coalition government's victory signalled that any major overhaul of the existing framework would face significant electoral resistance. Since then, no major party has taken a substantive negative gearing reform policy to a federal election, though the debate resurfaces periodically in the context of housing affordability discussions.
The 2019 election result was, in practical terms, a referendum on negative gearing. Australian investors have operated with reasonable certainty since then that the existing framework will be maintained -- though policy risk is never entirely absent in a long-term investment.
7 The Role of Depreciation Schedules
One of the most underutilised tools in a property investor's arsenal is the tax depreciation schedule, prepared by a qualified quantity surveyor. This document identifies all the deductions available under Division 40 (plant and equipment) and Division 43 (capital works) of the tax legislation, applied to your specific property.
Division 43 capital works deductions apply to the building structure itself and are available for residential properties constructed after 17 July 1985 at a rate of 2.5% per year for 40 years. A property that cost $350,000 to construct would generate $8,750 per year in capital works deductions -- a purely paper loss that requires no cash outflow.
Division 40 plant and equipment deductions cover depreciable assets within the property -- hot water systems, carpets, blinds, ovens, air conditioning units, and dozens of other items. Each item is depreciated over its effective life as determined by the ATO. Newer properties with recently installed fixtures can generate substantial plant and equipment deductions in the early years of ownership.
The practical effect is that depreciation can transform a property that is marginally positively geared on a cash flow basis into a significantly negatively geared property on paper -- creating a tax deduction without any additional cash leaving your pocket. A quantity surveyor's depreciation schedule typically costs between $600 and $800, is itself tax-deductible, and almost always recovers its cost many times over in the first year of use. It is not optional for serious property investors.
8 The Real Risks of Negative Gearing
The tax benefit of negative gearing can create a false sense of security. The strategy carries genuine risks that must be understood before committing to it.
- Reliance on capital growth. Negative gearing only produces a net positive outcome if the property appreciates in value by more than the cumulative holding losses. If capital growth is flat or negative over your holding period, you have simply made a loss -- partially offset by tax, but a loss nonetheless. Not all properties in all markets deliver the capital growth assumed in the investment thesis.
- Cash flow pressure. A negatively geared property requires you to top up the shortfall between rental income and expenses from your personal income every single month. This is manageable when you are employed and earning a strong income. It becomes a serious problem if you lose your job, take extended leave, or face an unexpected reduction in income at the same time as rising costs.
- Interest rate sensitivity. Mortgage interest is typically the largest component of a negatively geared investor's expense base. When rates rise sharply -- as they did between May 2022 and November 2023, when the Reserve Bank increased the cash rate from 0.10% to 4.35% in just 18 months -- the holding cost of a negatively geared property increases significantly. An investor who stress-tested their position at 2% above the rate they borrowed at in 2021 was still caught by the full extent of that cycle.
- Vacancy risk. Rental income assumptions can be disrupted by vacancy. Even a few weeks of vacancy each year affects your net return and increases the cash flow shortfall you must personally fund.
- Legislative risk. Tax law can change. While the 2019 election result provided comfort, no investment strategy should be built entirely on the assumption that a particular tax concession will remain in place indefinitely.
9 When Negative Gearing Makes Sense -- and When It Does Not
Negative gearing makes the most sense when all of the following conditions are present:
- You are on a high marginal tax rate (ideally 37% or 45%), so the tax offset is material.
- You have strong, stable income that can comfortably absorb the monthly cash flow shortfall without financial stress.
- The property is in a market with genuine, evidence-backed long-term capital growth drivers -- population growth, infrastructure investment, constrained supply, employment diversity.
- You have a long investment horizon of at least seven to ten years, giving the capital growth thesis time to outperform the accumulated holding losses.
- You have an adequate financial buffer to manage vacancy, interest rate rises, or unexpected maintenance without being forced to sell at an inopportune time.
Negative gearing is a poor strategy when:
- You are on a low or moderate marginal tax rate, making the tax offset too small to meaningfully reduce your holding cost.
- The property is in a market with limited capital growth drivers, meaning the core thesis of the strategy is absent.
- You cannot comfortably fund the monthly shortfall from your income without financial stress.
- You need the investment to be self-funding from the outset because you cannot sustain ongoing top-ups.
- You are close to retirement and cannot risk a holding period long enough for capital growth to outweigh accumulated losses.
A negatively geared property in a flat market is simply a loss-making investment with a partial tax rebate. The tax concession does not change the underlying economics -- it merely changes how much of the loss is subsidised by your other income.
How to Decide: A Practical Framework
Before committing to a negatively geared investment strategy, work through the following questions honestly and with real numbers:
Step 1: Calculate your true annual holding cost. Model the expected rental income for the property and subtract all realistic expenses -- mortgage interest at current rates plus a 2% buffer, management fees, rates, insurance, repairs, and depreciation. The net figure tells you how much you will be funding out of pocket each year, before the tax benefit.
Step 2: Calculate your after-tax cost. Multiply your net rental loss by your marginal tax rate (including Medicare levy) to determine the tax saving. Subtract this from the pre-tax shortfall to find your true annual out-of-pocket cost. This is the price you are paying annually for the capital growth option.
Step 3: Model the capital growth required to break even. Add up the after-tax holding costs over your intended holding period and determine what capital growth rate is required for the property to break even. Compare this to the historical and forecast growth rate for the specific market and property type. If the required growth rate is significantly higher than the market's track record, the strategy is speculative.
Step 4: Stress-test your serviceability. Model your cash flow position if your income dropped by 20%, if the property was vacant for eight weeks, and if the interest rate rose by a further 1.5%. Can you sustain the strategy through all three scenarios simultaneously? If not, you are over-leveraged.
Step 5: Get professional advice. A good accountant can confirm your deductible expenses, ensure your depreciation schedule is in place, and model the tax outcomes for your specific income and circumstances. A buyer's agent can assess whether the specific property you are considering has the capital growth fundamentals to justify the holding costs. Neither step is optional for a serious investment decision.
Negative gearing is neither a guaranteed path to wealth nor a flawed policy to be dismissed. It is a specific strategy with specific conditions under which it works well. Applied to the right property, in the right market, by an investor with the right income and financial resilience, it is a legitimate and effective tool for building long-term wealth through property. Applied without rigour, it is simply a tax-assisted way to make a loss.
If you would like to discuss how negative gearing fits within your investment strategy, and whether the properties you are considering have the growth fundamentals to support it, we welcome the conversation.