If you’re new to property investing, you’ve probably heard the term negative gearing. But what does it really mean? Is it good or bad, and who benefits most?
This guide, written by an expert mortgage broker in Brisbane, explains negative gearing in plain English. We’ll show you how it works with real examples, plus the benefits, risks, and impact on the housing market.
At Hunter Galloway, we’ve helped thousands of Australians build property strategies. By the end, you’ll know if negative gearing could play a role in your investment journey.
Let’s dive in
What Is Negative Gearing?
According to the Australian Taxation Office (ATO), negative gearing occurs when your rental income is less than your deductible expenses, including interest on borrowings.1 This creates a net rental loss, which can then be used to reduce your other taxable income, such as your salary.1 In simple terms, you are spending more to hold the property than you earn in rent, with the strategic goal of achieving long-term capital growth.
Why Investors Use It
Investors use negative gearing to lower their annual tax bill. They also aim to build wealth over time. This approach can free up cash flow for future property investments.
Reliance on Capital Growth
Negative gearing often depends on property value growth. Investors accept short-term losses for long-term gains. If the property appreciates, it can outweigh earlier losses.
Key Points to Remember
- Reduces taxable income for eligible investors
- Works best with steady rental demand
- Relies on long-term property appreciation
Negative gearing explains why investors tolerate early losses for future financial benefits.
Negative Gearing vs Positive Gearing
Understanding the difference between negative and positive gearing helps investors make smarter property decisions. Each strategy suits different financial goals. Here is a simplified comparison of the two strategies:
Feature | Negative Gearing | Positive Gearing |
Cash Flow | Generates short-term losses | Generates regular income |
Tax Benefits | Reduces taxable income | Offers limited tax benefit |
Risk Level | Carries higher short-term risk | Carries lower short-term risk |
Dependence | Depends on capital growth | Depends on rental income |
Ideal Investor | Builds long-term wealth | Seeks steady cash flow |
Which Strategy Suits Different Investors
- Long-term investors: Use negative gearing to maximise future capital growth.
- Income-focused investors: Use positive gearing to receive steady monthly cash flow.
- Those with tax planning needs: Apply negative gearing to lower annual tax bills.
You can also try a positive or negative gearing calculator to determine which strategy fits your goals.
An Example Of Negative Gearing: Sandra’s Case Study
Let’s walk through a practical example of how negative gearing works, using a hypothetical investor named Sandra.
Sandra’s Property Details
- Purchase price: $700,000
- Loan: $560,000 (80% LVR)
- Loan interest rate: 6.0% per year (representative of the RBA average for new investment loans in mid-2025).
- Rental income: $28,000 per year (approximately $538 per week, in line with Sydney’s median for all tenancies as of March 2025).
- Other expenses: $12,000 per year (maintenance, council rates, insurance).
Step 1: Calculate Annual Rental Shortfall
First, we calculate Sandra’s total annual expenses and compare them to her rental income.
- Her rental income is $28,000.
- Her loan interest is $33,600 (6.0% of $560,000).
- Her other expenses are $12,000.
- Total costs: $33,600 + $12,000 = $45,600 per year.
This gives her a rental shortfall of $17,600 ($45,600 – $28,000). This shortfall is her negatively geared loss.
Step 2: Apply Tax Benefit
Now, we see how this loss reduces her tax bill. Sandra earns a $90,000 salary. She can subtract the $17,600 rental loss from her taxable income, which brings her new taxable income down to $72,400.
Because her new taxable income falls within the 30% marginal tax bracket (based on 2024-2025 tax rates), her tax saving is calculated as:
$17,600 (rental loss) x 0.30 (marginal tax rate) = $5,280.
This is the amount her annual tax bill is reduced by.
Understanding Marginal Tax Rates (2024-2025)
The benefit of negative gearing is greater for those on higher incomes. Here are the official ATO tax rates for 2024-2025:
Taxable Income | Tax Payable |
$0 – $18,200 | Nil |
$18,201 – $45,000 | 16c for each $1 over $18,200 |
$45,001 – $135,000 | $4,288 plus 30c for each $1 over $45,000 |
$135,001 – $190,000 | $31,288 plus 37c for each $1 over $135,000 |
$190,001 and over | $51,638 plus 45c for each $1 over $190,000 |
Note: These rates do not include the 2% Medicare levy.
Step 3: Monthly Cash Flow Impact
Finally, let’s look at the real-world impact on Sandra’s monthly finances.
- Her total annual shortfall is $17,600, which means she needs to cover $1,467 ($17,600 ÷ 12) per month out-of-pocket.
- However, her annual tax saving of $5,280 helps offset this cost. That’s a reduction of about $440 per month.
- She can receive this tax saving either as a lump sum at the end of the financial year or by applying for a PAYG withholding variation to reduce the tax taken from her paycheck each month.
What Expenses Can You Claim On An Investment Property?
Claiming the right expenses is crucial for managing your investment property’s cash flow. However, the Australian Taxation Office (ATO) has a fundamental rule that governs all deductions: **the property must be rented or genuinely available for rent.
This means it must be actively and broadly advertised, with reasonable rent and conditions, to attract tenants.
Expenses are divided into two main categories:
- Those you can claim immediately
- Those you must claim over several years
Category of Expense: Immediate Deductions (Claim in Full This Year)
These are ongoing costs related to managing the property and earning rental income. They can be claimed in the same financial year they are paid.
Examples include:
- Advertising for tenants
- Bank charges
- Body corporate fees
- Council rates
- Insurance (building, contents, public liability)
- Interest on loans
- Land tax
- Property agent fees
- Repairs and maintenance
- Water charges
Category of Expense: Expenses Claimed Over Several Years
These are typically larger, capital-related costs whose value is deducted over time.
Examples include:
- Borrowing expenses (if over \$100, claimed over 5 years)
- Depreciation of assets (decline in value for items like ovens and carpets)
- Capital works (for the building’s structure or major improvements, typically claimed at 2.5% per year over 40 years)
Repairs vs Improvements (ATO Rules)
The ATO makes a critical distinction between repairs and improvements:
Repairs: Work to fix wear and tear or damage that occurred as a result of renting out the property (e.g., replacing a broken window). These are immediately deductible.
Improvements: Work that makes something better than it was originally or changes its character (e.g., renovating an entire kitchen). These are capital works and must be claimed over time.
Depreciation Explained (and its Impact on Capital Gains Tax)
Depreciation is a non-cash deduction for the decline in value of the building (capital works) and its fittings (plant and equipment).
While this reduces your taxable income each year, any amount claimed as a capital works deduction reduces the property’s cost base when you sell it.
This means your taxable capital gain will be larger. In effect, you get a tax benefit now but may pay more Capital Gains Tax later.
What Are The Benefits Of Negative Gearing?
Negative gearing offers several advantages for Australian property investors. While it carries risks, the potential benefits can be significant when managed wisely.
Tax Savings
One of the biggest benefits of negative gearing property is the ability to reduce taxable income.
- If your investment runs at a loss, you can offset that loss against your salary or other income.
- Higher-income earners often benefit the most, as their marginal tax rate is higher.
- This tax relief can help make property ownership more affordable in the short term.
Cash Flow Management
Negative gearing can also support cash flow management.
- By offsetting losses against income, you reduce the financial pressure of holding an investment property.
- This can free up funds for future investments or help cover ongoing household expenses.
- Careful planning ensures you balance out-of-pocket costs with the expected tax refund.
Potential Long-Term Wealth Growth
Most investors use negative gearing with a long-term strategy in mind.
- They accept short-term cash flow losses while waiting for capital growth.
- If the property value rises, those gains can far outweigh the earlier losses.
- Over time, the property can generate equity, which investors often leverage to grow their portfolios.
Who Benefits Most from Negative Gearing?
High-Income vs Middle-Income Earners
Negative gearing often benefits high-income earners the most. Why? Because the tax savings increase with higher taxable incomes. A high-income professional can offset larger losses and reduce their overall tax bill significantly.
Middle-income investors also use negative gearing, but the benefits are smaller. Their tax deductions are lower, so the strategy may not deliver the same financial impact.
Investors vs First-Home Buyers
Property investors gain a clear advantage from negative gearing. They can grow portfolios while using tax benefits to offset rental losses. This makes it easier to compete in the housing market.
First-home buyers, however, often face tougher conditions. They compete with investors who enjoy these tax breaks. As a result, property prices can rise faster, making it harder for buyers to enter the market.
Impact on Renters
Renters feel the indirect effects of negative gearing. Supporters argue it boosts housing supply, keeping rental options available. Critics say it drives property prices higher, which eventually flows into rental costs.
In short, negative gearing supports investors—especially those on higher incomes—while creating mixed outcomes for first-home buyers and renters.
What Are The Downsides Of Negative Gearing?
While negative gearing can provide tax savings, it also carries real risks. Investors should understand these downsides before committing.
Reliance on Capital Growth
Negative gearing relies heavily on long-term property value growth.
- You accept short-term losses now, expecting the property to increase in value later.
- If prices stagnate or fall, your strategy may fail to deliver gains.
This reliance makes timing and location critical for success.
Interest Rate and Vacancy Risks
Two major risks can directly impact your cash flow:
- Interest rate rises: Higher rates increase loan costs and deepen your shortfall.
- Vacancies: Empty periods mean no rental income, which magnifies losses.
Both risks can stretch your finances and force you to dip into savings.
Impact on First-Home Buyers and Housing Affordability
Many critics argue that negative gearing reduces housing affordability.
- Investors often compete with first-home buyers, driving prices higher in some areas.
- This creates barriers for new buyers trying to enter the property market.
For this reason, some see why negative gearing is bad for broader housing policy.
The Bottom Line
Negative gearing isn’t suitable for every investor. It works best when you manage cash flow, plan for risks, and invest for long-term growth.
Negative Gearing In the Bigger Picture: Tax System & Policy Context
Negative gearing doesn’t exist by accident. It forms part of Australia’s broader tax framework, designed to encourage property investment.
Why Negative Gearing Exists in Tax Law
The tax system allows investors to deduct investment losses from their taxable income.
- This rule applies across many investments, not just property.
- The goal is to encourage investment and stimulate economic activity.
- For property, it creates incentives for private investors to supply rental housing.
A Short History of Negative Gearing in Australia
Negative gearing has been part of the tax system for decades.
It first became popular in the 1980s as property investment grew. In 1985, the government briefly removed full negative gearing benefits.
Rents rose sharply in some cities, leading to public backlash. By 1987, negative gearing returned in its current form. Since then, it has remained a core feature of the Australian tax landscape, despite repeated calls for reform.
Policy Debate Over Fairness and Housing Market Effects
Despite its advantages, negative gearing remains one of Australia’s most debated tax policies.
- Supporters argue it boosts rental supply and rewards long-term investors.
- Critics highlight the disadvantages of negative gearing, pointing to higher property prices and reduced affordability for first-home buyers.
- Policymakers regularly debate whether the system is fair, sustainable, and effective.
The Takeaway
Negative gearing shapes both individual investment strategies and Australia’s wider housing market. Understanding its role in the tax system helps you see the bigger picture—not just the personal impact.
What Are The Negative Gearing Changes In Australia In 2025?
While negative gearing remains a hot topic, no changes have been passed into law for 2025. However, there are active political proposals for reform that investors should be aware of.
Proposals for Reform
The Australian Council of Trade Unions (ACTU) has proposed limiting negative gearing and the 50% Capital Gains Tax (CGT) discount to a single investment property. The proposal includes a five-year “grandfathering” period for existing investors to adjust.10
The Australian Greens have a similar policy, proposing to grandfather the benefits for one existing investment property but remove them for any additional properties and all new purchases.
Current Government and Opposition Stance
Despite these proposals, leaked Federal Treasury advice from 2025 indicates that changes to negative gearing are “off the table” for the current Labor government, which is focused on housing supply reforms.
The Liberal opposition has strongly rejected the reform proposals, with Senator Andrew Bragg labelling them “absolute garbage” and arguing they would not solve the core issue of housing supply.
The Takeaway for Investors
The law is currently stable, but the ongoing political debate creates long-term uncertainty. Prudent investors often “stress-test” their strategies to ensure they would remain financially viable even if tax concessions were reduced in the future.
Bonus: Major Rental Law Changes Affecting Landlords and Renters in 2025
Australia’s rental landscape has undergone significant reforms in 2025. These changes aim to balance the interests of landlords and tenants, ensuring fairness and clarity. Here’s a breakdown of the most impactful updates:
2025 Rental Law Changes: Summary Table
Australia’s rental landscape has undergone significant state-based reforms in 2025. These changes aim to balance the interests of landlords and tenants, and it’s crucial for landlords to stay informed to remain compliant.
Below is a summary of the key rental law changes across Victoria, New South Wales, and Queensland.
Reform Area | Victoria | New South Wales | Queensland |
Effective Date | Most changes effective Nov 25, 2025. | Key changes effective Oct 31, 2024 & May 19, 2025. | Key changes effective May 1, 2025. |
Tenancy Termination | ‘No reason’ evictions at end of fixed term are banned. Landlords must provide a valid reason. | ‘No-grounds’ terminations are banned. Landlords must provide a valid reason and supporting evidence in some cases. | No changes to termination grounds in this reform package. |
Rent Increases & Bidding | Notice period for increases extended to 90 days. All forms of rental bidding are banned. | Rent increases limited to once per 12 months for all lease types. | Rental bidding is banned. Renters must be offered a fee-free payment option. |
Pets in Rentals | No changes in this reform package. | Tenants have a right to request a pet. Landlords can only refuse on specific, reasonable grounds and must respond within 21 days. | No changes in this reform package. |
Privacy & Applications | A new standard application form will be introduced to protect tenant data. | Fees for applications and background checks are banned. | A standardised application form is now mandatory, limiting the personal data that can be collected. Entry notice period increased to 48 hours for most entries. |
Negative Gearing FAQs
What is negative gearing?
Negative gearing is when your investment property expenses exceed rental income. This loss can reduce your taxable income. It allows investors to offset property losses against other earnings.
How is negative gearing calculated?
Negative gearing is calculated by subtracting property expenses, including loan interest, repairs, and depreciation, from rental income. The result shows whether your property is generating a loss or profit. This helps investors understand potential tax deductions.
Can I negative gear my own home?
You cannot negative gear your own home because it must be an investment property. Primary residences do not qualify for tax-deductible losses. Only properties held to generate rental income are eligible.
How does negative gearing reduce tax?
Negative gearing reduces tax by allowing rental losses to offset other taxable income. This lowers your overall tax liability. It is particularly beneficial for higher-income earners with larger tax rates.
What expenses can I claim when negatively gearing?
Investors can claim interest, repairs, insurance, property management fees, and rates. Depreciation on fixtures and the building structure is also deductible. Claiming these expenses reduces taxable income and improves cash flow.
Is negative gearing suitable for first-time investors?
Negative gearing can help first-time investors manage short-term cash flow. However, it relies on long-term property appreciation to be profitable. New investors must understand out-of-pocket risks before committing.
What is the difference between positive and negative gearing?
Negative gearing occurs when property expenses exceed rental income. Positive gearing occurs when rental income exceeds expenses. Each strategy suits different investor goals and risk tolerance.
Can negative gearing affect my cash flow?
Yes, negative gearing can affect cash flow because expenses may exceed rent. Tax deductions can offset some of this loss. Investors must plan carefully to manage ongoing short-term costs.
How do Australian banks treat negatively geared properties?
Banks consider negatively geared properties when assessing loans. They factor in rental income, loan repayments, and tax deductions. This affects borrowing capacity and loan approval for investors.
What is a negative gearing tax refund calculator?
A negative gearing tax refund calculator estimates tax savings from property losses. It uses rental income, expenses, and taxable income. This helps investors understand how negative gearing impacts finances.
Do negatively geared properties benefit from depreciation?
Yes, negatively geared properties benefit from depreciation because it increases deductible losses. Depreciation applies to both fixtures and the building structure. Claiming it reduces taxable income and improves cash flow.
Why do some investors use negative gearing?
Investors use negative gearing to manage cash flow and reduce annual tax liability. They accept short-term losses expecting long-term capital growth. This strategy helps build wealth while leveraging tax benefits.
Can I claim repairs versus renovations when negative gearing?
Yes, repairs are immediately deductible, while renovations are added to the property’s cost base. Repairs fix wear and tear; renovations improve the property. Understanding the difference ensures compliance with ATO rules.
How does negative gearing affect long-term wealth growth?
Negative gearing can reduce short-term cash flow but may enhance long-term wealth. Tax savings free up funds to invest elsewhere. Capital growth ultimately determines whether the strategy is profitable.
Are there risks with negative gearing?
Yes, risks include reliance on capital growth, interest rate changes, and vacancy periods. Short-term losses can strain finances if not managed. Investors must plan for these scenarios to avoid surprises.
Can negative gearing work with multiple properties?
Yes, negative gearing can apply to multiple investment properties. Each property’s losses can offset taxable income. Investors often use this strategy to grow portfolios strategically.
Does negative gearing work outside Australia?
Negative gearing exists in Australia, but some countries, like the UK, have different rules. Investors must understand local tax law before applying similar strategies overseas. Australian rules are designed for the federal tax system.
What are the advantages and disadvantages of negative gearing?
The advantages include tax savings, cash flow management, and potential capital growth. Disadvantages include reliance on long-term growth, interest rate risk, and reduced affordability for first-home buyers. Understanding both helps investors make informed property decisions.
Conclusion: Is Negative Gearing Right for You?
Negative gearing could help you reduce tax and manage cash flow, but it’s not right for every investor. If you’re a high-income earner, you may benefit most, while first-time buyers should weigh short-term risks. Speak with a qualified broker to see how it fits your goals and your property strategy.
Our team at Hunter Galloway is here to help you set up an investment property in Australia. Unlike other mortgage brokers who are just one person operations, we have an entire team of experts dedicated to help make your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
More Resources For Homebuyers:
Disclaimer:
The information provided in this guide is for general informational purposes only and does not constitute financial, legal, or taxation advice. All information is provided in good faith; however, we make no representation or warranty of any kind regarding its accuracy or completeness. You should not rely on this information as a substitute for professional advice. We strongly recommend you consult with qualified professionals (such as a financial advisor, accountant, and solicitor) before making any investment decisions.
Start again
