What Is Negative Gearing?
Negative gearing is a property investment strategy where the annual costs of owning an investment property — primarily mortgage interest, plus rates, insurance, maintenance, and property management fees — exceed the rental income the property generates. The shortfall (the "loss") is tax-deductible against other income, such as your salary.
Australia's tax system has allowed negative gearing since the income tax legislation was first enacted. It remains unchanged in 2025 and applies to both new and existing residential properties, as well as commercial property and shares. The key provision is found in section 8-1 of the Income Tax Assessment Act 1997, which allows deductions for losses incurred in gaining or producing assessable income.
How the Tax Benefit Works
The tax benefit of negative gearing is often misunderstood. The property does not become "free" — you still have a real cash outflow each week. What negative gearing does is reduce your tax bill, which partially offsets that cash outflow.
Example: Property purchased for $700,000. Loan: $560,000 (80% LVR) at 6.5% interest only = $36,400/year interest. Weekly rent: $550 = $28,600/year. Annual costs (rates, insurance, management, maintenance): $9,000. Net rental loss: $28,600 − ($36,400 + $9,000) = −$16,800.
At the 37% marginal tax rate (income $120,001–$180,000), the tax saving is: $16,800 × 37% = $6,216/year ($119/week). After the tax benefit, the true weekly cash outflow drops from $323/week to $204/week.
The Real Cost of Holding a Negatively Geared Property
Many investors focus on the tax saving without calculating their true cash position. Use this calculator to find your "after-tax weekly cost" — the real amount you need to fund from your salary each week to hold the property. For the example above, $204/week is the true cost: it's a real cash expense, not zero.
Investors typically accept this ongoing cost because they expect the property to appreciate in value over time (capital growth), producing a profit when sold. The negative gearing strategy works best when: (1) the property is in a high-growth location, (2) the investor is in a high marginal tax bracket, and (3) the investor can comfortably service the weekly cash shortfall from salary without financial stress.
Negative Gearing vs Positive Gearing
A positively geared property (rental income exceeds all costs) generates taxable income. While it is cash-flow positive, the profit is added to your assessable income and taxed at your marginal rate. Positive gearing is more common in regional areas, smaller towns, or high-yield commercial properties where purchase prices are lower relative to rents.
In Australia's major cities — Sydney, Melbourne, and Brisbane — residential property gross rental yields of 2–4% are typical, while mortgage costs at 6%+ make negative gearing the norm for investors with standard LVRs.
Deductible Expenses for Investment Properties
The ATO allows deductions for the following ongoing costs:
- Mortgage interest — the largest deduction for most investors. Only the interest component of repayments is deductible (not principal repayments). Interest-only loans maximise the annual deduction.
- Council rates and water charges — deductible in the year paid.
- Insurance premiums — landlord insurance, building insurance, and contents insurance for furnished properties.
- Property management fees — charged by the property manager, typically 7–12% of gross rent plus letting fees.
- Strata levies / body corporate fees — for apartments, townhouses, and units in strata schemes.
- Repairs and maintenance — work that restores the property to its original condition. Capital improvements (which add new value) are not immediately deductible but can be claimed via depreciation.
- Depreciation— building depreciation (2.5% p.a. on post-September 1987 construction costs) and depreciation on plant and equipment (ovens, carpet, air conditioning) can be claimed annually. A quantity surveyor's depreciation schedule costs $500–$800 and typically produces thousands of dollars in annual deductions.
- Advertising and letting costs — advertising for tenants, lease preparation fees.
Capital Gains Tax When You Sell
When you sell the property, capital gains tax applies to the net capital gain (sale price minus cost base). The cost base includes the purchase price, stamp duty, legal fees, and the cost of any capital improvements. Depreciation claimed during the holding period may reduce the cost base of depreciable assets.
If held for more than 12 months, a 50% CGT discount applies to individuals — only half the gain is added to taxable income. For a $300,000 gain, only $150,000 is taxed, saving $55,500 in tax for someone in the 37% bracket compared to the full gain being taxed.
Is Negative Gearing a Good Investment Strategy?
Negative gearing is a tax strategy, not an investment strategy by itself. Whether it is "good" depends on:
- Capital growth: The total return must be positive (capital gain + cumulative rental income − cumulative costs). Strong capital growth is needed to justify the ongoing cash outflow.
- Your marginal tax rate: The higher your rate (37% or 45%), the more valuable the tax deduction. At 19% (lower income earners), the benefit is modest.
- Serviceability: You must be able to fund the weekly shortfall from your income without financial stress, especially if interest rates rise or the property is vacant.
- Property selection: High-growth locations with strong rental demand are essential. A negatively geared property in a declining market destroys wealth.
Always obtain advice from a qualified property investment adviser, tax accountant, and mortgage broker before making any investment property decision. This calculator provides general estimates only.