Negative gearing is one of the most discussed — and misunderstood — concepts in Australian property investment. It's not a strategy in itself, but it's an important tax mechanism that influences how millions of Australians structure their property portfolios.
What Is Negative Gearing?
A property is negatively geared when the rental income it generates is less than the costs of owning it (mortgage interest, rates, insurance, management fees, depreciation). The resulting loss can be offset against your other income — typically your salary — reducing your total taxable income.
There are three states a property can be in:
- Negatively geared: Rental income < Expenses. You make a loss each year, but get a tax deduction.
- Neutrally geared: Rental income ≈ Expenses. Breaks even. No tax benefit but no out-of-pocket cost.
- Positively geared: Rental income > Expenses. Makes a profit. You pay tax on the surplus.
How the Tax Deduction Works
When your investment property runs at a loss, that loss reduces your taxable income dollar for dollar. The actual tax saving depends on your marginal tax rate:
- At 32.5% marginal rate: every $1 of loss saves you 32.5c in tax
- At 37% marginal rate: every $1 of loss saves you 37c
- At 45% marginal rate: every $1 of loss saves you 45c
Worked Example — Negatively Geared Property
Let's say you buy a $650,000 property in Parramatta with a 20% deposit ($130,000) and a $520,000 interest-only loan at 6.2% interest.
- Annual rental income: $660/week × 52 = $34,320
- Annual interest: $520,000 × 6.2% = $32,240
- Other expenses (rates, insurance, management, repairs): ~$8,500
- Depreciation (building + fittings, if applicable): ~$4,000
- Total expenses: $44,740
- Annual loss: $34,320 − $44,740 = −$10,420
At a 37% marginal rate, this $10,420 loss saves you approximately $3,855 in tax per year. Your actual out-of-pocket cost is $10,420 − $3,855 = $6,565/year (about $126/week).
The investor's bet: that capital growth over time will more than offset the annual holding cost.
What Can You Claim?
Deductible expenses for an investment property include:
- Loan interest (the largest deduction for most investors)
- Property management fees
- Council and water rates
- Landlord insurance
- Repairs and maintenance (not improvements — those are capital)
- Depreciation on the building (2.5%/year for buildings built after 1985)
- Depreciation on fixtures and fittings (via a quantity surveyor's depreciation schedule)
- Accounting fees related to the investment
You cannot claim: the principal portion of loan repayments, purchase costs (stamp duty, conveyancing — these are added to the cost base), or personal use portions.
Negative Gearing vs Positive Gearing — Which Is Better?
There's no universal answer. It depends entirely on your situation:
Negative gearing suits you if:
- You're on a high marginal tax rate (37%+) — the tax saving is more valuable
- You're buying in a high-growth market where appreciation will outpace losses
- You have stable income to cover the holding costs
- You have a long investment horizon (10+ years)
Positive gearing suits you if:
- You're on a lower income or retired (less benefit from the tax deduction)
- You want the property to pay for itself
- You're buying in a regional market with strong yields (Darwin, Cairns, Salisbury)
- You want to scale your portfolio without straining your cash flow
Is Negative Gearing Still Worth It in 2026?
With interest rates elevated at 6%+, the cost of negative gearing is higher than it was in the 2010s when rates were 3–4%. A property that was mildly negative at 3% interest may be deeply negative at 6.2%. This has pushed many investors toward higher-yield markets (Perth, Adelaide, regional QLD) where near-neutral or positive gearing is achievable.
The fundamental calculation remains the same — if you believe the capital growth will exceed the cumulative losses, negative gearing is rational. In markets like inner Sydney and Melbourne, that bet has historically paid off over 10–15 year horizons. Whether it continues to is the core debate in Australian property investing.
Model your cashflow including negative gearing impact — free
Open Cashflow Calculator →Not financial advice. Tax outcomes depend on your individual circumstances. Always consult a registered tax agent or financial adviser.