How Negative Gearing Works in Australia
Negative gearing is one of the most talked-about tax strategies for Australian property investors. But what does it actually mean, and how can it benefit you? This guide breaks it down in plain English.
What Is Negative Gearing?
A property is "negatively geared" when the costs of owning it exceed the rental income it generates. In other words, you are making a loss on the property each year.
The key benefit: under Australian tax law, you can offset that rental loss against your other income (such as your salary or business income). This reduces your total taxable income, which means you pay less tax overall.
How the Tax Deduction Works
The rental loss is calculated as:
Rental income - Deductible expenses = Taxable rental income/loss
Deductible expenses include:
- Loan interest - the interest portion of your mortgage repayments (not the principal)
- Property management fees - typically 7-10% of rent collected
- Council and water rates
- Insurance - building and landlord insurance
- Repairs and maintenance - like fixing a leaky tap or repainting
- Depreciation - wear and tear on the building and fittings
- Body corporate/strata fees
- Land tax - varies by state
- Advertising for tenants
- Pest control
- Legal costs for leases and evictions
Negative Gearing vs Positive Gearing
| Negative Gearing | Positive Gearing | |
|---|---|---|
| Income vs expenses | Expenses exceed income | Income exceeds expenses |
| Cash flow | Costs you money each week/month | Puts money in your pocket |
| Tax effect | Reduces your taxable income | Increases your taxable income |
| Strategy | Capital growth focused | Income focused |
| Best for | Higher income earners | Lower income earners or retirees |
Who Benefits Most from Negative Gearing?
The tax benefit of negative gearing scales with your marginal tax rate:
| Taxable Income | Marginal Rate | Tax saved per $10K loss |
|---|---|---|
| $18,201 - $45,000 | 16% | $1,600 |
| $45,001 - $135,000 | 30% | $3,000 |
| $135,001 - $190,000 | 37% | $3,700 |
| $190,001+ | 45% | $4,500 |
As you can see, someone on the top marginal rate saves almost three times as much as someone on the 16% rate, from the same rental loss.
The Role of Depreciation
Depreciation is a "paper loss" - you claim a tax deduction without actually spending any money. There are two types:
- Division 43 (Capital Works) - the building structure itself, claimed at 2.5% per year for 40 years
- Division 40 (Plant and Equipment) - items like ovens, carpets, blinds, and hot water systems. Each has its own effective life and depreciation rate.
A quantity surveyor can prepare a depreciation schedule for your property, typically costing $400-$800. The fee itself is tax deductible.
Risks of Negative Gearing
Negative gearing is not a guaranteed path to wealth. Key risks include:
- Cash flow pressure - you need to fund the shortfall between rent and expenses out of your own pocket each month
- Interest rate rises - higher rates increase your losses and cash flow pressure
- Capital growth is not guaranteed - if the property does not grow in value, you are simply losing money
- Vacancy periods - no rental income but expenses continue
- Policy changes - governments may change negative gearing rules in the future
Common Mistakes
- Buying purely for tax benefits - the tax deduction only offsets a portion of your loss. You are still out of pocket.
- Ignoring cash flow - make sure you can afford the weekly/monthly shortfall, even if interest rates rise
- Not getting a depreciation schedule - this is free money that many investors miss
- Over-leveraging - borrowing too much relative to your income
Frequently Asked Questions
Can I negatively gear more than one property?
Yes. There is no limit to the number of negatively geared properties you can own. All rental losses are combined and offset against your total income.
Do I need to declare rental income on my tax return?
Yes. All rental income must be declared. You claim your deductible expenses against this income. If the result is a loss, that loss reduces your other taxable income.
What happens if I sell a negatively geared property?
When you sell, you pay capital gains tax on any profit. If you held the property for more than 12 months, you receive a 50% CGT discount. The depreciation you claimed may be "recaptured" and added back to your capital gain.
Is negative gearing being abolished?
As of March 2026, there are no confirmed plans to abolish negative gearing. It has been a feature of Australian tax law for decades, though various political parties have proposed changes over the years.