Negative gearing is one of Australia’s most discussed property investment concepts — and one of the most misunderstood. Here’s a plain-English explanation of what it actually is, how it affects your tax position and when it makes sense for investors.
What is negative gearing?
A property is negatively geared when the costs of owning it (mortgage interest, rates, management fees, maintenance and depreciation) exceed the rental income it generates. The resulting loss can be offset against your other income — typically your salary — reducing your overall taxable income.
A simple example
If your investment property generates $28,000 in annual rent but costs $38,000 to hold (including interest, rates, insurance and management), the $10,000 shortfall is a tax loss. If your marginal tax rate is 37%, this saves you $3,700 in tax — effectively reducing your out-of-pocket holding cost.
Key point: Negative gearing is not a reason to buy a bad property. It reduces the cost of holding a growth asset — but the real return still depends on capital appreciation. You need both.
When negative gearing makes sense
- You have a high marginal tax rate (37% or 45%) that maximises the tax benefit
- You have strong income and serviceability to absorb the holding cost
- You are targeting a high-quality growth location where capital appreciation justifies the short-term cost
- You have a longer hold horizon (7+ years) to realise the capital growth
When it may not make sense
- Low income earners receive minimal tax benefit from the deduction
- Investors who need monthly cashflow to service living expenses
- Those near retirement who cannot afford long hold periods to realise capital growth