Negative Gearing Australia
Explained Simply

How negative gearing works in practice

Example: You earn $120,000/year in salary. Your investment property generates $22,000/year in rent but costs $35,000/year to hold (mortgage interest, management, rates, insurance). Your net loss is $13,000. This $13,000 is deductible against your $120,000 salary — you're now taxed on $107,000. At a 37% marginal rate, you save $4,810 in tax.

Negative gearing tax deductions

Deductible expenses include: mortgage interest (not principal), property management fees (typically 7–10% of rent), council rates, water rates, landlord insurance, repairs and maintenance, advertising for tenants, and depreciation. Depreciation is a non-cash deduction that can significantly improve after-tax returns.

When does negative gearing make sense?

Negative gearing makes financial sense when: you have a high marginal tax rate (37–45%), the property has strong capital growth prospects that outweigh negative cash flow, you can comfortably sustain the negative cash flow, and you plan to hold the property for 7+ years to realise capital gains.

Negative gearing vs positive gearing

Positive gearing (cash flow positive) means rent exceeds all costs — you receive net income each week. This improves borrowing capacity for future investments and reduces financial risk. Negative gearing relies on capital growth to generate overall profit. Perth and regional markets often allow positive gearing; Sydney and Melbourne typically require negative gearing strategies.

Capital gains tax and negative gearing

When you sell a negatively geared property, any capital gain is taxable. However, the 50% CGT discount applies to properties held for more than 12 months — effectively halving the capital gains tax liability. Your total return from a negatively geared property is: capital gain (after CGT discount) + tax savings from negative gearing - total holding costs.

Risks of negative gearing

• You must fund the shortfall from your income each week
• If rents fall or the property is vacant, your losses increase
• Interest rate rises increase your negative cash flow
• Capital growth must materialise for the strategy to succeed
• If you lose your job, sustaining the property becomes difficult