Negative gearing is one of the most discussed tax strategies in Australian property investing. When an investment property costs more to hold than it earns in rent, the shortfall is described as a “loss” — and under current Australian tax law, this loss can generally be offset against the investor’s other assessable income, reducing their income tax bill.
What Is Negative Gearing?
A property is negatively geared when the total deductible costs of owning the property (mortgage interest, property management fees, council rates, repairs, depreciation) exceed the gross rental income received.
Example:
- Annual gross rent: $28,000
- Annual deductible costs (interest, rates, management, depreciation): $42,000
- Net rental loss: $14,000
Under current tax rules, this $14,000 loss can be offset against the investor’s other income — salary, wages, business income — reducing their taxable income by $14,000.
Tax benefit at a 37% marginal tax rate: $14,000 × 37% = $5,180 reduction in income tax
How Negative Gearing Works — Step by Step
- You own an investment property that costs more to hold than it earns in rent
- At tax time, you declare rental income and claim all allowable deductions
- If deductions exceed income, the net rental loss is offset against your total assessable income
- Your taxable income is reduced, lowering your income tax payable
- The ATO processes this through your tax return (via myTax or a tax agent)
What Costs Are Deductible?
Allowable deductions for a negatively geared investment property include:
- Mortgage interest (the largest deduction for most investors)
- Property management fees
- Council rates
- Water rates and body corporate levies
- Landlord insurance
- Repairs and maintenance (immediate deductions)
- Depreciation on the building structure (Division 43) and plant/equipment (Division 40) — see Depreciation on Investment Property
- Accounting fees for investment tax returns
- Advertising for tenants
- Travel to inspect the property (limited — ATO rules have tightened)
Capital improvements (e.g., a new kitchen) are generally not immediately deductible — they are added to the cost base or depreciated over time.
Who Benefits Most from Negative Gearing?
The tax benefit of negative gearing is directly linked to the investor’s marginal tax rate. The higher the marginal rate, the larger the tax saving from the loss.
| Marginal tax rate | $14,000 rental loss — tax saving |
|---|---|
| 19% | $2,660 |
| 32.5% | $4,550 |
| 37% | $5,180 |
| 45% | $6,300 |
Higher-income investors receive the largest proportional tax benefit from negative gearing.
Negative Gearing vs Positive Gearing
| Feature | Negative Gearing | Positive Gearing |
|---|---|---|
| Rental income vs costs | Costs > income | Income > costs |
| Cash flow | Negative (you top up each month) | Positive (cash surplus each month) |
| Tax effect | Reduces taxable income | Increases taxable income |
| Common strategy | Capital growth focus | Yield focus |
See Positive Gearing Explained.
The Capital Growth Assumption
Negative gearing only “works” as a complete investment strategy if the property also achieves sufficient capital growth over time to more than compensate for the ongoing cash shortfall. The ongoing monthly top-up (mortgage interest in excess of rent) represents a real cash cost that must be funded from income.
If property values stagnate or fall, a negatively geared investor bears both the ongoing cash loss and a capital loss — without the tax benefit being enough to compensate.
Negative Gearing on Shares
Negative gearing is not exclusive to property. Investors who borrow to invest in shares (e.g., via a margin loan) and whose investment income is less than their borrowing costs are also negatively geared on those investments. The same principle applies — the net loss offsets other income.
ATO and Negative Gearing
The ATO provides detailed guidance on claiming rental deductions. Common mistakes include:
- Claiming improvements as repairs (different treatment)
- Claiming expenses for periods when the property was not genuinely available for rent
- Overclaiming depreciation without a formal quantity surveyor’s report
Related Articles
- Positive Gearing Explained
- Investment Property Tax Deductions
- Depreciation on Investment Property
- Capital Growth vs Rental Yield
- Property Investing hub
Frequently Asked Questions
Is negative gearing legal in Australia? Yes. Negative gearing is a well-established feature of Australian tax law — it is simply the principle that investment losses can be offset against other income. It applies to any investment (property, shares, etc.), not just property.
Does negative gearing mean I’m getting money from the government? Not exactly. The tax benefit reduces the amount of tax you pay — it does not result in a direct cash payment from the ATO (unless it creates a refund on tax already withheld via PAYG). You still bear the monthly cash shortfall between rent and costs.
What happens if negative gearing is abolished? As of 2026, negative gearing on property remains available under Australian tax law. Policy discussions about limiting or abolishing negative gearing have occurred but no changes have been legislated. This article reflects current law. Investors should not base a long-term strategy on the assumption that tax rules will not change.
This article provides general financial information only. For advice tailored to your situation, speak with a licensed financial adviser. You can find one through the ASIC financial advisers register or MoneySmart.