Is Negative Gearing Worth It?
Negative gearing is one of Australia's most discussed tax strategies. But does the tax benefit actually make you better off? Here's the reality.
What Negative Gearing Actually Means
A property is negatively geared when your expenses (loan interest, rates, insurance, repairs) exceed your rental income. The resulting loss can be deducted from your other income, reducing your tax.
Example: $10,000 Rental Loss
- Rental income: $25,000
- Expenses: $35,000
- Net loss: -$10,000
Tax Benefit (37% rate)
- Tax reduction: $3,700
- Still out of pocket: $6,300
The Tax Benefit by Marginal Rate
| Marginal Rate | $10,000 Loss | Tax Benefit | Real Cost |
|---|---|---|---|
| 19% | -$10,000 | $1,900 | -$8,100 |
| 30% | -$10,000 | $3,000 | -$7,000 |
| 37% | -$10,000 | $3,700 | -$6,300 |
| 45% | -$10,000 | $4,500 | -$5,500 |
| 47% (incl. ML) | -$10,000 | $4,700 | -$5,300 |
Even at the highest tax rate, you're still losing money each year. The strategy only works if capital growth makes up for these losses.
When Negative Gearing Makes Sense
- High capital growth expectation: You expect the property to increase in value significantly
- High marginal tax rate: You're in the 37%+ tax bracket
- Long-term investment horizon: You can hold for 10+ years
- Strong cash flow elsewhere: You can absorb annual losses comfortably
- Depreciation benefits: New or renovated properties offer substantial non-cash deductions
When Negative Gearing Doesn't Make Sense
- Low tax bracket: The tax benefit is minimal at 19-30% rates
- Cash flow stress: You struggle to cover the shortfall
- Uncertain growth: The location has poor capital growth prospects
- Short-term plans: Transaction costs eat into any gains
- Approaching retirement: Less time to benefit from capital growth
The Role of Depreciation
Depreciation is a non-cash deduction that can significantly impact your position. You claim wear and tear on the building and fixtures without actually spending money that year.
Key insight: A property can be tax-negative (showing a loss for tax purposes) while being cash-flow positive (you actually pocket money each month) thanks to depreciation.
Calculate Your Investment Property Position
See your actual cash position and tax benefit with our rental property calculator.
Investment Property CalculatorFrequently Asked Questions
Does negative gearing mean I get free money from the ATO?
No. Negative gearing means you're making a loss on your investment property—your expenses exceed your rental income. The tax benefit only offsets part of that loss. You're still out of pocket, just less than you would be without the tax deduction.
What marginal tax rate makes negative gearing worthwhile?
Negative gearing provides more benefit at higher tax rates. At 47% marginal rate, nearly half your loss is offset by tax savings. At 19%, you only get back 19 cents per dollar of loss. The strategy is most effective for those in the 37% or higher tax brackets.
Should I pay down the loan or keep it interest-only?
Interest-only loans maximise your deductible interest expense. However, you should balance tax benefits against the long-term cost of not paying down principal. Many investors use interest-only for 5-10 years while building equity through capital growth.
Is positive gearing better than negative gearing?
Positive gearing means you're making a profit, which is generally better for cash flow and financial security. However, you'll pay tax on the profit. The best strategy depends on your goals—cash flow vs capital growth—and your tax situation.