What is Negative Gearing?
Definition
Negative Gearing
Negative gearing is an investment strategy where the costs of owning a rental property, including loan interest, maintenance, insurance, and depreciation, exceed the rental income it generates. The resulting loss can be deducted from your other taxable income, reducing the amount of tax you pay.
Negative gearing is one of Australia's most widely used property investment strategies and one of its most politically debated tax policies. Around 1.3 million Australians negatively gear at least one investment property. The strategy relies on claiming a short-term tax loss while banking on long-term capital growth to deliver an overall profit when the property is eventually sold. For a deeper look at how the strategy works in practice, see our complete guide to negative gearing.
How Negative Gearing Works
When you negatively gear a property, your annual rental income is less than your total deductible expenses. The difference, the net rental loss, is offset against your salary, business income, or other taxable income.
Example calculation:
- Annual rental income: $25,000
- Loan interest: $28,000
- Council rates, insurance, management fees: $5,000
- Depreciation and capital works deductions: $4,000
- Total expenses: $37,000
- Net rental loss: $25,000 − $37,000 = −$12,000
If your marginal tax rate is 30% (2024-25 onward after Stage 3 tax cuts), this $12,000 loss reduces your tax bill by approximately $3,840 (including 2% Medicare levy). You are still $8,160 out of pocket for the year, but the strategy assumes the property's capital growth will more than compensate over time.
Negative Gearing vs Positive Gearing
Negative Gearing vs Positive Gearing
| Criteria | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | Costs exceed income (out of pocket) | Income exceeds costs (profit) |
| Tax effect | Loss reduces taxable income | Profit adds to taxable income |
| Strategy | Relies on capital growth | Relies on rental yield |
| Risk level | Higher, depends on property values rising | Lower, generates income immediately |
| Best for | Higher-income earners in high tax brackets | Investors seeking steady cash flow |
If you are exploring positive gearing and cash flow strategies, read how to find positive cash flow properties in Australia.
The Policy Debate
Negative gearing has been a fixture of Australian tax policy for decades, though it remains politically contentious. Supporters argue it encourages private investment in rental housing, increasing supply and keeping rents more affordable. Critics contend it inflates property prices, primarily benefits wealthier investors, and costs the federal budget billions in foregone tax revenue each year.
Various reform proposals have been put forward over the years, including limiting negative gearing to new construction only, capping the amount that can be deducted, or phasing it out entirely. As of 2025, negative gearing remains available on both new and existing properties with no cap on the deductible amount.
Key Risks
- Interest rate rises: Higher rates increase loan costs and widen the annual loss.
- Vacancy periods: No rental income during vacancies means you bear the full cost.
- Flat or falling values: If the property does not grow in value, you may never recoup the accumulated losses.
- Policy changes: Future government changes to negative gearing rules could reduce or eliminate the tax benefit.
Frequently Asked Questions
Yes. Negative gearing is a legitimate tax strategy under Australian tax law. You can deduct net rental losses from your other taxable income, provided you meet the ATO's requirements for holding the property as a genuine investment and keeping accurate records of all income and expenses.
No. Negative gearing only applies to investment properties that generate (or are genuinely available to generate) rental income. Your primary residence is not an income-producing asset, so its costs are not tax-deductible.
There is no limit on the number of properties you can negatively gear. However, each additional negatively geared property increases your annual out-of-pocket costs and your exposure to market and interest rate risk. Lenders will also assess your serviceability across all loans.
Yes. When you sell the property, any capital gain is subject to CGT. However, if you have held the property for more than 12 months, you are eligible for the 50% CGT discount, which significantly reduces the tax payable on the gain.
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