What is Negative Gearing in Australia?
Last updated: 7 May 2025
Negative gearing is one of the most debated tax strategies in Australia — and one of the most misunderstood. It allows property investors to deduct losses on an investment property from their other income, reducing their tax bill. Here's exactly how it works, what it actually costs you, and whether it makes financial sense.
The basic concept
A property is negatively geared when the costs of owning it (mortgage interest, rates, insurance, maintenance, property management, depreciation) exceed the rental income it generates. The resulting loss can be deducted against your other income — typically your salary — reducing the income tax you pay.
A property is positively geared when rental income exceeds all costs, generating a profit. This profit is added to your taxable income.
A worked example
| Item | Annual amount |
|---|---|
| Rental income | $26,000 |
| Less: Mortgage interest | −$32,500 |
| Less: Council rates, insurance, management | −$6,500 |
| Less: Depreciation (building + fittings) | −$4,000 |
| Net rental loss | −$17,000 |
If this investor earns $120,000 in salary, the $17,000 rental loss reduces their taxable income to $103,000. At a marginal rate of 30%, the tax saving is approximately $5,100 per year.
However — the investor is still making a net loss of $17,000 minus $5,100 = $11,900 out of pocket per year. Negative gearing is not a profit strategy. It's a tax-minimisation strategy that works only if capital growth on the property exceeds the ongoing losses.
The 50% capital gains tax discount
Negative gearing is most powerful when combined with the CGT discount. If you hold an investment property for more than 12 months, any capital gain on sale is taxed at only 50% of your marginal rate. At a 30% marginal rate, the effective CGT rate is 15%.
This is the core of the negative gearing strategy: accept losses during the holding period (partially offset by tax deductions), then realise a capital gain taxed at half the normal rate. The strategy relies entirely on property values increasing enough to cover the accumulated net losses.
What can be claimed as a tax deduction?
- Mortgage interest: Only the interest component, not principal repayments
- Council rates and water charges
- Strata/body corporate fees
- Property management fees: Typically 7–10% of rent
- Repairs and maintenance: Ongoing repairs, not capital improvements
- Building depreciation: 2.5% of construction cost per year for buildings built after 1987
- Plant and equipment depreciation: Appliances, carpet, hot water systems
- Insurance premiums
- Advertising for tenants
- Landlord insurance
Capital improvements (renovations, extensions) are not immediately deductible — they're added to the cost base and reduce the capital gain on eventual sale.
Does negative gearing actually make sense?
The financial case depends almost entirely on capital growth assumptions:
- In high-growth markets (Sydney, Melbourne 2010–2021): Strong capital growth made the annual losses worthwhile. The property doubled in value faster than the accumulated losses.
- In flat or declining markets: You sustain annual losses with no offsetting capital growth. The tax benefit doesn't compensate — you lose money.
- Compared to shares: An investor who puts the same annual "out of pocket" amount into index ETFs may achieve better after-tax returns without the illiquidity, management overhead, and concentration risk of property.
Common misconceptions
"The government pays for it." Not quite. The tax saving offsets part of the loss, but you're still making a real financial loss on the property each year. The government is partially subsidising your investment loss, not paying for the property.
"Any negatively geared property is a good investment." The tax benefit is the same regardless of property quality. A depreciating property in a low-growth area with a negative gearing loss is still a bad investment — the tax saving is small comfort against permanent capital loss.
The policy debate
Negative gearing is frequently debated in Australian politics. Critics argue it inflates property prices by subsidising investor demand, reducing housing affordability for owner-occupiers. Supporters argue it increases rental supply and that removing it would reduce investor activity and further constrain rental availability.
As of 2025, negative gearing remains fully available for investment properties in Australia. Any future changes would likely be grandfathered for existing properties.
General information only — not financial or tax advice. Individual circumstances vary significantly. Consult a registered tax agent or financial adviser for advice specific to your situation. Sources: ATO Rental Properties guide, ATO Capital Gains Tax guide.