Negative gearing occurs when the costs of owning an investment property (or other investment) exceed the income it generates. In Australia, this net loss can generally be deducted against your other income — such as salary or wages — reducing your total taxable income and therefore your tax bill. Negative gearing is legal, widely used, and has been a feature of the Australian tax system for decades.
What Is Negative Gearing?
Gearing refers to borrowing money to invest. If the investment generates enough income to cover all the costs, it is positively geared. If costs exceed income, it is negatively geared — you are running at a cash loss.
In Australia, the tax law allows that loss to be offset against other assessable income in the same year. This is the tax benefit of negative gearing.
$$\text{Negatively geared loss} = \text{Rental expenses} - \text{Rental income}$$
$$\text{Tax saving} = \text{Net loss} \times \text{Marginal tax rate}$$
Negative Gearing — Worked Example
| Item | Amount |
|---|---|
| Annual rental income | $26,000 |
| Loan interest | $28,000 |
| Council rates | $1,800 |
| Landlord insurance | $1,200 |
| Property management fees | $2,600 |
| Depreciation (non-cash) | $4,500 |
| Other expenses | $1,000 |
| Total expenses | $39,100 |
| Net rental loss | $13,100 |
The investor’s salary is $110,000. After offsetting the $13,100 loss:
| Before negative gearing | After negative gearing | |
|---|---|---|
| Taxable income | $110,000 | $96,900 |
| Approximate tax (incl. Medicare levy) | ~$29,500 | ~$24,975 |
| Tax saving | ~$4,525 |
The investor receives a $4,525 reduction in tax — not a $13,100 reduction. The tax saving depends on their marginal rate. At a 39% marginal rate (37% + 2% Medicare), the saving is $13,100 × 39% = $5,109.
The Role of Depreciation
A significant component of negative gearing tax benefits comes from depreciation — a non-cash deduction. You do not actually spend money on depreciation; it represents the theoretical decline in value of the building structure and fittings over time. Because depreciation is deductible but requires no cash outflow, it can push a property into negative territory (or deepen the loss) without worsening your actual cash position.
This is why a property can be cash flow positive (rent covers actual cash expenses) yet negatively geared for tax purposes when depreciation is included.
Who Benefits Most From Negative Gearing?
Because the tax saving equals the loss multiplied by the marginal tax rate, higher-income earners with higher marginal rates receive a proportionally larger tax saving:
| Income | Marginal rate (incl. Medicare) | Tax saving on $10,000 rental loss |
|---|---|---|
| $45,000 | 21% | $2,100 |
| $80,000 | 34.5% | $3,450 |
| $120,000 | 39% | $3,900 |
| $200,000 | 47% | $4,700 |
This distributional feature has been the focus of policy debate — critics argue negative gearing disproportionately benefits high-income earners and inflates property prices.
Negative Gearing vs Positive Gearing — Pros and Cons
| Negative gearing | Positive gearing | |
|---|---|---|
| Cash flow | Negative — you fund the shortfall | Positive — income exceeds costs |
| Tax benefit | Reduces your tax bill now | No immediate tax benefit; generates taxable income |
| Reliance on | Capital growth to profit overall | Rental yield covering costs |
| Risk | Higher if property doesn’t grow | Lower — ongoing cash surplus |
Negatively geared investors rely on capital growth to make the overall investment profitable. The tax benefit partially offsets the cash shortfall, but if the property does not increase in value, the cumulative losses may outweigh any eventual gain.
The Capital Gains Tax Interaction
When you eventually sell a negatively geared property at a profit, the capital gain is subject to CGT. If you held the property for more than 12 months, the 50% CGT discount applies — so only half the gain is taxable.
Some investors describe the combined effect of negative gearing tax benefits + 50% CGT discount on eventual sale as a double benefit of the current system. Policy proposals to reform either (or both) of these settings have been debated at various federal elections.
Is Negative Gearing Only for Property?
No. Negative gearing applies to any investment where borrowing costs and other expenses exceed investment income — including:
- Shares (where interest on a margin loan exceeds dividends)
- Managed funds
- ETFs (with borrowed funds)
The same deduction rules apply: the net investment loss can offset other income. However, the practical application is most common with property because of the scale of borrowing involved.
Related Articles
- Tax on Rental Income Australia
- Investment Property Tax Deductions
- Capital Gains Tax on Property
- Tax on Investments hub
- Taxes hub
Frequently Asked Questions
Can I negatively gear if I don’t have a job? You can still have investment losses, but you need income to offset them against. If you have no other assessable income (salary, business income, other investment income), a rental loss may be limited in its usefulness — it can be deferred and carried forward, but provides no immediate tax benefit without income to offset.
Will negative gearing be abolished? Negative gearing reform has been discussed at multiple federal elections (notably 2016 and 2019) but has not been enacted as at 2026. Any change to negative gearing rules would require legislation and would likely include grandfathering for existing property investors.
Can I negatively gear my principal place of residence? No. Negative gearing applies to investment properties (or other income-producing investments). Your home is not an income-producing asset — you cannot deduct home loan interest or other home costs against your salary.
This article provides general information about the Australian tax system. It is not personal financial or investment advice. For advice tailored to your situation, speak with a licensed financial adviser and registered tax agent. You can find advisers through ASIC’s MoneySmart and the Tax Practitioners Board register.