Negative vs Positive Gearing Explained

If you've spent any time researching property investment in Australia, you've heard the terms "negative gearing" and "positive gearing" thrown around constantly. They're fundamental concepts that directly affect your cashflow, tax bill, and long-term investment strategy.

In this guide, we break down exactly what each term means, how the numbers work in practice, and which approach makes more sense depending on your financial situation.

What Is Gearing?

Gearing simply means using borrowed money (a mortgage) to invest. Since most property investors borrow 80% or more of the purchase price, virtually all investment properties are "geared".

The question is whether that gearing is positive (the property makes you money each week) or negative (it costs you money each week, offset by tax benefits and future growth).

Negative Gearing: How It Works

A property is negatively geared when the total costs of owning it — mortgage interest, rates, insurance, management fees, maintenance, depreciation — exceed the rental income.

In other words, you're making a loss on the property each year. The key benefit? Under Australian tax law, you can deduct that loss from your other income (like your salary), reducing your total tax bill.

The investor is paying $289 per week out of their own pocket. The bet is that the property's value will grow by more than $15,029 per year (about 1.8% capital growth on an $850,000 property) to make the investment worthwhile.

Positive Gearing: How It Works

A property is positively geared when the rental income exceeds all costs of owning it. The property puts money in your pocket each week — it's cashflow positive.

The trade-off? You'll pay tax on the profit, and positively geared properties are typically found in areas with lower purchase prices and potentially less capital growth.

With a slightly larger deposit (say 25-30%) or even a modest rent increase, this property tips into genuinely positive cashflow territory — generating income from day one.

Negative vs Positive Gearing: Side by Side

Which Strategy Should You Choose?

Negative gearing makes sense when:

• You're in a high tax bracket (37% or 45%) — the tax deduction is worth more
• You're buying in high-growth locations with strong historical capital appreciation
• You have stable, high income that can comfortably absorb the weekly shortfall
• You're investing for the long term (10+ years) and prioritising wealth building over income
• You can afford to wait for growth without financial stress

Positive gearing makes sense when:

• You want cashflow now — properties that pay for themselves or even generate income
• You're in a lower tax bracket — negative gearing tax benefits are minimal
• You want to scale your portfolio — positively geared properties don't drain your income, making it easier to qualify for additional loans
• You're approaching or in retirement — you need income, not tax deductions
• You prefer lower risk — not dependent on capital growth to justify the investment

The Neutral Gearing Sweet Spot

There's a middle ground that many savvy investors target: neutral gearing. This is where the rental income roughly equals total costs — the property neither costs you money nor generates significant taxable income.

Neutrally geared properties are attractive because they:

• Don't require ongoing personal cashflow contribution
• Still benefit from any capital growth
• Don't add a large taxable income burden
• Are easier to hold through interest rate changes

Many properties that start negatively geared become neutrally or positively geared over time as rents increase while the loan balance (and therefore interest costs) decreases.

The Role of Depreciation

Depreciation is a non-cash deduction — you claim a tax deduction for the property's wear and tear without actually spending money. This can shift a property from positively geared to negatively geared for tax purposes, while still being cashflow positive in your bank account.

This is the best of both worlds: positive cashflow AND a tax deduction. It's more common with newer properties or those with recently renovated interiors, and it's why a depreciation schedule (prepared by a quantity surveyor) is essential for every investment property.

Common Misconceptions

"Negative gearing is always a good strategy"

No. Negative gearing only works if the property grows in value more than the ongoing losses. If growth doesn't materialise, you've simply been losing money with a partial tax refund as consolation. A property that loses $20,000/year but only grows $10,000/year is a bad investment regardless of tax benefits.

"Positive gearing means you'll pay too much tax"

The extra tax is only on the profit — not the total rent. If a property generates $5,000 net income and you're at the 32.5% bracket, you pay $1,625 in extra tax but keep $3,375. That's still $3,375 in your pocket. Taking home money is always better than losing money for a partial rebate.

"It is common to prioritise growth, but always verify at property level"

Growth is wonderful but unpredictable. Cashflow is certain (assuming tenants and reasonable management). A balanced portfolio with both growth and yield properties provides resilience and flexibility.

Remember: Gearing decisions interact with your entire financial position. Always consult a qualified accountant or financial adviser who specialises in property investment before committing to a strategy.

Key Takeaways

• Negative gearing = costs exceed income, tax-deductible loss, relies on capital growth
• Positive gearing = income exceeds costs, taxable profit, sustainable cashflow
• Your choice depends on income, tax bracket, risk appetite, and investment timeline
• Depreciation can make a cashflow-positive property negatively geared for tax purposes — the ideal scenario
• The best strategy often evolves as your portfolio and personal circumstances change

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