Negative gearing explained
What it is, how the tax deduction works, who it suits, and how to structure your investment loan to make the most of it.
What is negative gearing?
Negative gearing is when an investment property's running costs exceed its rental income, producing a net loss. Under Australian tax law, this loss is deductible against your other income, typically your salary, reducing the amount of tax you pay.
It's not a strategy that makes money on its own. It's a tax offset that reduces the after-tax cost of holding a property, making it more viable to wait for capital growth.
The strategy only works if the property grows in value over time: the capital gain (at a discounted rate after 12 months) offsets both the annual cash shortfall and ideally delivers a profit.
Worked example
At a 37% marginal tax rate, the $14,760 loss saves $5,461 in tax per year, reducing your real cash shortfall from $1,230/month to around $820/month.
Example only. Individual outcomes depend on income, tax rate, actual costs, and depreciation schedules. Consult a tax accountant.
Who benefits most from negative gearing?
Higher income earners
The tax deduction is worth more at higher marginal rates. At 47% (including Medicare), a $15,000 rental loss saves $7,050 in tax. At 19%, the same loss saves $2,850.
Long-term holders
Negative gearing relies on capital growth to generate a profit. The longer you hold, the more growth you can accumulate while the annual tax offset reduces your cost of carry.
Investors in growth areas
Strong capital growth areas (like many Brisbane suburbs) are where negative gearing strategies produce the best outcomes: the growth overwhelms the annual cash shortfall.
Work with both a broker and an accountant
Your mortgage broker structures the loan (interest-only vs P&I, offset vs redraw, loan splitting) for tax efficiency. Your accountant handles depreciation schedules, tax returns, and CGT planning. The best outcomes come when both professionals communicate. We're happy to work directly with your accountant.
Structuring your investment loan
How you structure an investment loan has a direct impact on your tax position, cash flow, and future ability to grow your portfolio.
Interest-only period
Maximises deductibility: the entire repayment is deductible interest, not a mix of interest and non-deductible principal repayment. Preserves cash flow for the portfolio-building phase.
Separate offset for savings
Keep investment loan funds separate from personal savings. Mixing can affect deductibility of interest. An offset account on your owner-occupier loan (not the investment) is the preferred structure.
Loan splitting
With multiple properties, correctly split loans ensure each property's deductibility is maintained clearly. Mixing purpose can compromise all deductions.
Negative gearing FAQs
What is negative gearing?
Negative gearing occurs when your investment property's income (rent) is less than its total holding costs (mortgage interest, rates, insurance, maintenance, depreciation). The resulting loss is deductible against your other income, usually your salary, reducing your taxable income and therefore your tax bill. It's a tax strategy, not a guarantee of profit; it works best when combined with capital growth.
Is negative gearing still available in Australia?
Yes. As of 2025, negative gearing remains fully available for residential and commercial investment properties. There have been political discussions about limiting it to new properties only, but no legislative change has been enacted. Existing property investors retain full negative gearing entitlements.
What costs can I deduct on an investment property?
Deductible costs include: mortgage interest (the biggest item), property management fees, council rates, water rates, insurance, repairs and maintenance, accounting fees, advertising for tenants, body corporate levies, depreciation on building and fixtures (division 40/43), and land tax. Capital improvements (not repairs) are not immediately deductible: they're added to the cost base for CGT purposes.
How does the 50% capital gains discount work?
If you hold an investment property for more than 12 months before selling, only 50% of the capital gain is included in your taxable income. For example, if you buy at $500,000 and sell at $750,000, the gain is $250,000, but only $125,000 is added to your taxable income. At a 37% marginal rate, the tax on the gain is $46,250: not $92,500. This is why negative gearing is often paired with a long-term hold strategy.
What's the difference between negative, neutral, and positive gearing?
Negative: property costs more to hold than it earns in rent: a cash flow loss that creates a tax deduction. Neutral: income exactly covers costs: no cash flow impact, no tax effect. Positive: income exceeds costs: positive cash flow, but fully taxable. Most Australian investors deliberately negatively gear at purchase, expecting the tax benefit plus capital growth to outweigh the cash shortfall.
Should I use interest-only or principal & interest for an investment loan?
Interest-only maximises your tax deduction (you're only paying interest, so the entire repayment is deductible) and preserves cash flow. Principal & interest reduces the loan balance faster but also reduces the tax deduction over time. The 'right' choice depends on your overall financial position, cash flow needs, and how long you plan to hold the property. Your mortgage broker and accountant should advise together.