Negative Gearing
When the costs of owning an investment property (interest, expenses) exceed the rental income, creating a tax-deductible loss.
Negative gearing occurs when the total expenses of an investment property (mortgage interest, rates, insurance, maintenance, depreciation, property management fees) exceed the rental income, creating a net rental loss. Under Australian tax law, this loss can be offset against your other assessable income (such as salary), reducing your overall taxable income and therefore your tax bill.
For example, if your rental income is $25,000 per year and your total expenses are $35,000 (including $20,000 in interest), you have a net rental loss of $10,000. On a marginal tax rate of 30%, this reduces your tax by $3,000. However, you are still $7,000 out of pocket after the tax benefit — negative gearing doesn't make a loss profitable, it only reduces the after-tax cost of that loss.
The strategy relies on the expectation that capital growth on the property will more than compensate for the ongoing rental losses. When you eventually sell the property, the capital gain is subject to CGT — with the 50% discount if held for more than 12 months and sold before 1 July 2027, and with cost-base indexation plus a 30% minimum tax on the real gain if sold on or after that date. Negative gearing has been politically contentious in Australia, with periodic debate about whether it should be limited or abolished. Currently, it applies to all asset types (not just property) and there is no cap on the amount of losses that can be offset against other income.
How it works
Negative gearing happens when the total costs of holding an investment property — mortgage interest, rates, insurance, maintenance, depreciation, and property management fees — exceed the rental income it brings in, creating a net rental loss. Under Australian tax law, that loss offsets your other assessable income, such as salary, directly reducing your overall taxable income and tax payable, rather than being quarantined against future rental profits from the same property.
In practice, the loss appears on the rental income and expenses section of your tax return, reducing your tax bill at assessment time. Many investors also arrange a PAYG withholding variation so less tax is withheld from their salary throughout the year, spreading the benefit out instead of waiting for one lump-sum refund after lodging.
The strategy reduces the after-tax cost of a loss — it doesn't turn the loss into a profit, and investors remain genuinely out of pocket each year the property runs at a deficit. It only pays off overall if the property's eventual capital growth, taxed under CGT when sold (with the 50% discount if held over 12 months and sold before 1 July 2027, and with cost-base indexation plus a minimum tax on the real gain from that date on), outweighs the accumulated after-tax losses along the way. Negative gearing applies to any asset type, not just property, and there's currently no cap on how much loss can be offset against other income, which is why the policy has remained politically contentious.
Example: the after-tax cost of a negatively geared property
Suppose an investment property earns $28,000 in rental income for the year against $40,000 in total expenses, including $24,000 of interest — a net rental loss of $12,000. On a 30% marginal tax rate, that loss reduces the investor's tax bill by $3,600 ($12,000 x 30%).
Even with that $3,600 tax saving, the investor is still $8,400 worse off in cash terms for the year ($12,000 loss minus the $3,600 tax benefit) — negative gearing lowers the cost of the loss, it doesn't eliminate it. The strategy only pays off overall if the property's capital growth, realised when it's eventually sold and taxed under CGT, ends up outweighing the accumulated after-tax losses along the way.
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Rental Income
Income received from renting out a property, which must be declared as assessable income in your tax return.
Depreciation (Rental Property)
Tax deductions for the declining value of a rental property's building structure and plant & equipment (fixtures and fittings).
Capital Gains Tax (CGT)
Tax on the profit made from selling or disposing of an asset, such as property, shares, or cryptocurrency.
Principal Place of Residence (PPOR)
Your main home, which is generally exempt from capital gains tax when sold.
Income Tax
Tax levied by the federal government on your taxable income, calculated using progressive tax brackets.