Negative gearing is one of the most discussed — and most misunderstood — concepts in Australian property investment. Politicians argue about it constantly. Investors swear by it. Critics say it inflates house prices. But most people who use it don’t fully understand the mechanics.
Let me explain it clearly.
What Is Negative Gearing?
A property is negatively geared when the costs of owning it — primarily mortgage interest, property management fees, maintenance, and depreciation — exceed the rental income it generates.
The “gearing” refers to the use of borrowed money (a loan) to fund the investment. When the investment returns less than it costs, you have a net loss — and in Australia, that loss can be offset against your other income (such as your salary) to reduce your taxable income.
A Simple Example
Say you own an investment property that generates $26,000 per year in rent ($500/week). Your annual costs are:
- Mortgage interest: $32,000
- Property management: $2,600
- Rates, insurance, maintenance: $3,000
- Depreciation: $4,000
- Total costs: $41,600
Your net loss is $15,600 per year. If your marginal tax rate is 37%, you save $5,772 in tax. So the real out-of-pocket cost of the investment is $15,600 minus $5,772 = $9,828 per year — roughly $189/week.
The Critical Thing Most People Miss
Negative gearing is not a strategy in itself — it’s a tax treatment. The underlying strategy is capital growth: the assumption that the property’s value will increase enough to more than offset the annual losses.
If a property doesn’t grow in value, being negatively geared just means you’re losing money more slowly. The ATO’s guidance on rental deductions is the authoritative source on what you can and can’t claim.
What Can You Claim?
Generally deductible in the year incurred: interest on the investment loan, property management fees, council rates, landlord insurance, repairs and maintenance, accounting fees, and travel to inspect the property.
Depreciation is claimed separately via a tax depreciation schedule, which your accountant can organise.
See also: What the RBA rate cycle means for your investment property — as rates change, your negative gearing position changes too.
Sources: Australian Taxation Office | Reserve Bank of Australia | ABS