Negative Gearing vs Positive Cashflow (2025-26)

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.

Read this first — negative gearing was reformed on 12 May 2026. From 1 July 2027, rental losses on established residential property are quarantined: they can offset only other residential property income, not your salary. Excess losses carry forward. Three things sit outside that: property held at 7:30 PM AEST on 12 May 2026 is grandfathered indefinitely, property bought between that cutoff and 30 June 2027 negative gears normally only until 30 June 2027, and new builds keep full negative gearing. Anything you buy today is in that second group. See Negative gearing reform Budget 2026: what changed, by purchase date for the four buckets and the eligibility tests. The rest of this guide describes the pre-reform mechanics, which still govern grandfathered properties and every income year up to 2026-27.

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

Up to and including the 2026-27 income year, rental property losses are not quarantined — they flow directly against your other income in the same year. This is the feature that has made negative gearing attractive in Australia.

From 1 July 2027 that stops being true for established residential property acquired after 7:30 PM AEST on 12 May 2026. For those properties, ITAA 1997 s 26-155 ring-fences the loss: it can be deducted only against other residential property income, and any excess carries forward to future years rather than reducing your salary. Grandfathered properties (held at the cutoff) and new builds are unaffected and continue to work as described below.

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:

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:

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

First, check which rules your property falls under — the answer below only holds where losses can still offset your salary, i.e. a property held at 7:30 PM AEST 12 May 2026, a new build, or any purchase for income years up to 2026-27. For an established property bought after the cutoff, the salary offset ends on 30 June 2027, and the high-marginal-rate rationale below is exactly what the reform removes: from 1 July 2027 the loss no longer reduces tax on your wages at all, whatever your marginal rate.

For a property still inside those rules, 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

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.

Sources

• ATO rental expenses (2025)
• ATO how to claim rental expenses
• ATO common property expenses