Negative Gearing vs Positive Cashflow (2025-26)
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Primary tax-year context: 2025-26
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General information only. Speak with a registered tax agent for advice.
Negative gearing and positive cashflow are not just accounting labels — they reflect fundamentally different investment strategies with different tax treatments, risk profiles, and suitability for different investors. This guide explains how each works under Australian tax law, when each makes sense, and what the numbers look like in practice.
The basic definitions
Negative gearing occurs when the deductible expenses of an investment property exceed the rental income it generates. The resulting loss can be offset against your other taxable income (such as salary), reducing your total tax bill.
Positive cashflow (positive gearing) occurs when the rental income exceeds the deductible expenses. The net profit is added to your taxable income and taxed at your marginal rate.
Both are entirely legal and recognised by the ATO. The question is which suits your circumstances.
How negative gearing works under Australian tax law
Under the ATO’s rules, rental property losses are not quarantined — they flow directly against your other income in the same year. This is the key feature that makes negative gearing attractive in Australia, and it distinguishes the Australian system from many other countries where such losses can only be applied against future rental income.
Deductible rental expenses include:
- Loan interest (the dominant expense for most negatively geared properties)
- Council rates, land tax, strata levies
- Property management fees
- Maintenance and repairs (not capital improvements)
- Insurance
- Depreciation on the building (2.5% per year on post-1987 construction) and on fixtures and fittings
Capital improvements are not immediately deductible — they are added to the cost base and may be depreciated over time.
The numbers: a worked example
Property: $600,000 purchase price Loan: $480,000 at 6.5% interest (80% LVR) Rent: $550/week = $28,600/year Annual interest: $31,200
Additional annual expenses:
- Property management (8%): $2,288
- Insurance, rates, maintenance: ~$3,000
- Depreciation (estimated): ~$2,500
Total deductible expenses: approximately $39,000 Rental income: $28,600 Annual loss: approximately $10,400
At different marginal rates, the tax saving from this loss is:
| Marginal rate | Tax saving on $10,400 loss | Out-of-pocket shortfall |
|---|---|---|
| 16% (income ~$30k) | $1,664 | $8,736 |
| 30% (income ~$80k) | $3,120 | $7,280 |
| 37% (income ~$150k) | $3,848 | $6,552 |
| 45% (income >$190k) | $4,680 | $5,720 |
The tax saving does not eliminate the cash shortfall — it reduces it. You still fund the remaining out-of-pocket amount every year. At 37% marginal rate, the investor funds about $6,500 per year from other income. At 16%, they fund nearly $8,800.
Interest rate sensitivity
The example above uses 6.5% interest. A 1% rate increase adds $4,800 per year to interest costs on a $480,000 loan — widening the loss to approximately $15,200 and requiring a higher top-up:
| Rate | Annual interest | Annual loss | Top-up at 37% |
|---|---|---|---|
| 5.5% | $26,400 | ~$5,600 | ~$3,528 |
| 6.5% | $31,200 | ~$10,400 | ~$6,552 |
| 7.5% | $36,000 | ~$15,200 | ~$9,576 |
As rates rise, the cash drain increases faster than the tax benefit — because the tax saving is a fraction of the loss, not all of it. This is the key interest rate risk for negatively geared investors.
When negative gearing makes sense
Negative gearing works best when:
- You have a high marginal tax rate (37-45%) — the tax saving is larger per dollar of loss
- You have reliable other income to fund the annual shortfall without financial stress
- You expect strong capital growth — the long-term CGT gain must more than offset the cumulative annual top-ups
- You have a long investment horizon — the property needs time to grow sufficiently for the strategy to pay off
- Interest rates are moderate — at very high rates, the annual shortfall becomes difficult to sustain
When positive cashflow makes sense
A positively geared property generates income rather than losses. You pay tax on the profit, but you also receive cash flow. This approach makes sense when:
- Your marginal rate is lower (16-30%) — the tax on profit is modest; the income is welcome
- You need the rental income — for example, approaching retirement or supplementing lower wages
- You are risk-averse — you do not want the ongoing obligation of funding a shortfall
- Interest rates are high — positively geared properties are less sensitive to rate rises
- Capital growth expectations are lower — you are focusing on yield rather than growth
Side-by-side comparison
| Factor | Negative gearing | Positive cashflow |
|---|---|---|
| Cash flow | Negative (you top up shortfall) | Positive (income stream) |
| Tax impact | Loss reduces your taxable income | Profit adds to your taxable income |
| Works best for | High marginal rate earners | All income levels |
| Rate sensitivity | High (rate rises worsen the position) | Low (income buffers rate rises) |
| Growth focus | Capital growth essential | Yield-focused |
| Risk profile | Higher (funding required each year) | Lower (self-sustaining) |
| Entry strategy | Higher-priced growth markets | Regional, higher-yield markets |
The capital growth equation
Negative gearing only makes financial sense in the long run if the capital gain on eventual sale more than offsets the cumulative annual losses.
Using the worked example: $6,500/year shortfall over 10 years = $65,000 out of pocket (before the tax saving, which reduced it from a gross $10,400). Over 10 years, the property needs to appreciate by well over $65,000 just to recover the holding costs — and that is before you account for the opportunity cost of that capital and the transaction costs on sale.
The 50% CGT discount (for assets held more than 12 months by Australian residents) improves the eventual return, but the maths still requires meaningful capital growth.
Common misconceptions
“Negative gearing pays for itself through tax savings.” It does not. The tax saving is a fraction of the annual loss — not a full offset. You always fund the remainder out of other income.
“Positive gearing is better because you make money each year.” Not necessarily — taxable rental income at high marginal rates can be less efficient than a negatively geared position that converts income into a deductible loss with strong capital growth.
“You should always maximise deductions.” Only deductible expenses matter — personal use costs, capital improvements (which are not immediately deductible), and non-rental periods must be excluded.
Practical implications for 2025-26
At current interest rates (above 6%), most investment properties in high-growth urban markets are negatively geared. The strategy remains viable for high-income earners with the cash flow to sustain it and a long holding horizon. Investors at lower marginal rates or near retirement are generally better served by positive cashflow properties or waiting until the loan is partially paid down and the property naturally moves toward neutral or positive gearing.