Negative Gearing Explained: The Complete Australian Guide (2026)

Negative gearing is a cornerstone of property investment strategy in Australia. It is used by hundreds of thousands of Australian investors to reduce their taxable income while building long-term wealth through capital growth. However, it is frequently misunderstood — and it is not the right strategy for everyone. For a foundational definition, see our glossary entry on what is negative gearing.

This guide explains exactly how negative gearing works, walks through real-world examples, examines the tax implications, and helps you decide whether it makes sense for your financial situation.

How Negative Gearing Works

The concept is straightforward: if your investment property costs more to hold than it earns in rent, you are "negatively geared." The Australian tax system allows you to deduct this loss against your other income (salary, business income, dividends, etc.), reducing your overall tax bill.

Here is a simplified example:

• Annual rental income: $25,000
• Annual property expenses: $38,000 (mortgage interest $28,000, rates $3,000, insurance $1,500, property management $2,000, maintenance $1,500, depreciation $2,000)
• Net rental loss: -$13,000

If your salary is $120,000, this $13,000 loss reduces your taxable income to $107,000. At a marginal tax rate of 37% (plus 2% Medicare levy), this saves you approximately $5,070 in tax. You are still out of pocket $7,930 per year ($13,000 loss minus $5,070 tax saving), but the strategy relies on the property's capital growth exceeding this annual cash shortfall over time.

Positive vs Negative Gearing

Understanding the spectrum of gearing is essential for making informed investment decisions.

• Negatively geared: Expenses exceed income. You claim a tax deduction on the loss but are out of pocket each year. The strategy depends on capital growth.
• Neutrally geared: Income and expenses are roughly equal. The property holds itself without costing you money, and you wait for capital growth.
• Positively geared: Rental income exceeds all expenses. The property puts money in your pocket each year. However, the surplus is added to your taxable income, increasing your tax bill. Positively geared properties are often found in regional areas with higher rental yields but potentially lower capital growth. See our guide on positive cash flow properties in Australia for strategies on finding them.

Many investors start negatively geared and become positively geared over time as rents increase while mortgage repayments remain fixed (or decrease if paying down principal). This transition typically takes 5-15 years depending on rental growth, interest rates, and the initial yield.

Tax Implications of Negative Gearing

How Depreciation Affects Gearing

Depreciation is the silent powerhouse of negative gearing. Because it is a non-cash deduction — you do not actually spend the money, but you still claim it as an expense — it can push a property from neutrally geared to negatively geared on paper, generating a tax benefit without any additional out-of-pocket cost.

Consider this example:

• Rental income: $30,000 per year
• Cash expenses (interest, rates, insurance, management, maintenance): $29,000 per year
• Cash position: +$1,000 (slightly positively geared in cash terms)
• Depreciation deductions: $8,000 per year
• Tax position: -$7,000 (negatively geared for tax purposes)

In this scenario, the property actually puts $1,000 cash in your pocket each year, but you also claim a $7,000 tax loss. At a 37% marginal tax rate (plus 2% Medicare levy), that $7,000 loss saves you $2,730 in tax. Your total annual benefit is $3,730 ($1,000 cash surplus plus $2,730 tax saving) — and you still benefit from any capital growth.

This is why getting a professional depreciation schedule is one of the highest-return investments you can make as a property investor. For properties built after 1985, depreciation deductions can be worth $5,000-$15,000 per year in the early years.

Negative Gearing vs Positive Cash Flow Strategies

The debate between negative gearing (growth-focused) and positive cash flow (income-focused) strategies is one of the most common in Australian property investing. Neither approach is universally better — the right choice depends on your financial position, income, risk tolerance, and investment timeline.

When Negative Gearing May Suit You

• You have a high taxable income (above $120,000) and are in a high marginal tax bracket, meaning the tax deduction is worth more to you.
• You can comfortably afford the annual out-of-pocket cost without financial stress.
• You are investing in a high-growth area (typically inner-city or established suburbs in capital cities) where capital growth is expected to significantly exceed the annual holding cost.
• You have a long investment horizon (10+ years) to ride out market cycles.
• You want to reduce your current tax bill while building wealth over time.

When Positive Cash Flow May Suit You

• You have a moderate income and cannot afford to subsidise a loss-making property each year.
• You want properties that generate income now, not just potential future capital gains.
• You are building a portfolio and need rental income to service future borrowings.
• You are closer to retirement and want income-producing assets rather than growth assets.
• You are willing to invest in regional areas or emerging suburbs with higher yields but potentially lower capital growth.

Many experienced investors use a blended approach — combining negatively geared growth properties with positively geared income properties to balance cash flow and wealth accumulation.

ATO Rules and Compliance

The ATO closely scrutinises rental property deductions. Investment property claims are one of the most common areas of adjustment in tax audits. Key compliance points include:

• Genuine intention to earn income: The property must be genuinely available for rent. If you use the property personally (even part-time), your deductions must be apportioned. A holiday home that sits empty most of the year and is rented out occasionally may not qualify for full deductions.
• Market-rate rent: If you rent the property to family or friends at a below-market rate, your deductions are limited to the income received. You cannot charge your child $100 per week for a property that would rent for $500 per week and claim the full expenses.
• Loan purpose matters: Only interest on the portion of the loan used to purchase or improve the investment property is deductible. If you redraw from your investment loan for personal expenses, that portion of the interest is not deductible. Keep investment and personal borrowings separate.
• Record keeping: The ATO requires you to keep records for 5 years from the date of your tax return. Keep receipts, bank statements, rental statements, loan documents, and depreciation schedules. Use a dedicated bank account for your investment property to simplify record keeping.
• Capital gains tax implications: When you eventually sell a negatively geared property, any capital gain is subject to capital gains tax (CGT). The 50% CGT discount applies if you have held the property for more than 12 months. Depreciation claimed on plant and equipment is also factored into the CGT calculation (it reduces your cost base).

The Political Debate: Will Negative Gearing Be Changed?

Negative gearing has been a subject of political debate in Australia for decades. Critics argue that it inflates property prices by encouraging speculative investment, disproportionately benefits high-income earners, and costs the federal budget billions in forgone tax revenue. Supporters argue that it encourages private investment in rental housing, increases the supply of rental properties, and reduces pressure on government-funded social housing.

Key points in the ongoing debate:

• The 2019 election: The Australian Labor Party took a policy to limit negative gearing to new properties only to the 2019 federal election and lost. The policy has since been shelved, but the debate continues.
• ATO data: According to ATO tax statistics, approximately 1.3 million Australians declared rental income in recent tax years, with roughly two-thirds reporting a net rental loss (i.e., negatively geared). The total net rental loss reported is typically in the range of $7-10 billion per year.
• International comparison: Australia is relatively unique in allowing unlimited negative gearing losses to be offset against salary and other income. Most comparable countries limit loss offsets to investment income only or cap the amount that can be claimed.
• Potential future changes: While no major political party currently has a policy to abolish or significantly restrict negative gearing, this could change. Investors should be aware that the tax treatment of investment properties is not guaranteed to remain unchanged indefinitely. Any investment strategy that relies entirely on tax benefits carries policy risk.

Who Benefits Most from Negative Gearing?

Negative gearing delivers the greatest benefit to investors who:

• Have high marginal tax rates. At the top marginal rate of 45% (plus 2% Medicare levy), every dollar of rental loss saves 47 cents in tax. At the 30% rate, the same dollar of loss saves only 32 cents. The tax benefit is proportionally larger for higher income earners.
• Buy in high-growth areas. Capital growth is the engine that makes negative gearing profitable. Investors who buy in suburbs with strong historical growth (typically 7-10% per annum over the long term in major capital cities) are more likely to see returns that exceed their annual cash losses.
• Hold for the long term. Property is a long-term investment. The 50% CGT discount (for assets held more than 12 months) significantly reduces the tax on eventual sale. Investors who hold for 10-20+ years benefit from compounding capital growth and typically transition to positive gearing as rents rise.
• Have a stable income and emergency fund. You need the financial resilience to cover the annual cash shortfall, vacancy periods, unexpected repairs, and interest rate rises. Investors who over-commit to negatively geared properties and cannot cover the costs during tough times may be forced to sell at a loss.

Worked Example: 10-Year Negative Gearing Scenario

Let us trace a simplified 10-year scenario for a negatively geared investment property:

• Purchase price: $650,000
• Loan amount: $520,000 (80% LVR, interest-only at 6.2%)
• Annual rental income (year 1): $28,000 (4.3% yield), growing at 3.5% per year
• Annual cash expenses (year 1): $42,000 (interest $32,240, rates $3,500, insurance $2,000, management $2,240, maintenance $2,020)
• Depreciation (year 1): $9,000
• Investor's marginal tax rate: 37% (plus 2% Medicare levy)
• Assumed capital growth: 6% per year (long-term average for well-located capital city property)

Year 1: Cash loss of $14,000. Tax loss of $23,000 (including depreciation). Tax saving of $8,970. Net out-of-pocket cost: $5,030.

Year 5: Rental income has grown to $32,300. Cash loss narrows to $9,700. Property value has grown to approximately $870,000, representing an unrealised capital gain of $220,000.

Year 10: Rental income reaches $38,400. The property is approaching neutral gearing in cash terms. Property value has grown to approximately $1,164,000, representing an unrealised capital gain of $514,000. Total out-of-pocket cost over 10 years (after tax savings): approximately $35,000-$45,000. Unrealised profit: approximately $470,000+.

This example illustrates why negative gearing can be a powerful wealth-building strategy for investors who can afford the holding costs and buy in areas with strong capital growth. However, if capital growth is only 3% per year instead of 6%, the unrealised gain at year 10 drops to approximately $224,000 — still profitable, but far less dramatic. And if growth is flat or negative, the investor suffers real losses.

Related Guides

• Capital Gains Tax on Property — How CGT is calculated when you sell an investment property, including the 50% discount and exemptions.
• Property Investing Guide — A comprehensive introduction to building a property investment portfolio in Australia.
• What Is Stamp Duty? — Understanding stamp duty (transfer duty) and how it affects your investment costs.
• Stamp Duty Calculator — Calculate stamp duty on your investment property purchase.