Finance

Negative Gearing: How It Works and What It's Worth

12 April 2026 13 min read Bold acquisition desk

Few topics generate more debate in Australian property circles than negative gearing. It is at once one of the country's most widely used investment strategies and one of its most politically contested tax provisions. For many investors it sits at the centre of their property portfolio. For others it is a source of confusion, misread as a government handout rather than the straightforward tax offset it actually is.

Strip out the politics and the mechanics are plain. When a property costs more to own and finance than it returns in rent, the shortfall comes off your taxable income. The question worth answering is not whether the deduction is real, it plainly is, but whether the strategy earns its keep over a full holding period, and for which investors.

1 What Negative Gearing Is, and What It Is Not

Negative gearing occurs when the costs of owning and financing an investment property exceed the rental income it generates. The resulting net loss can be offset against your other taxable income, typically your salary or wages, reducing your overall tax bill.

The word "gearing" refers to borrowing money to invest. A property is positively geared when rental income exceeds all holding costs, producing a net profit from day one. It is negatively geared when costs exceed rental income, producing a net loss. It is neutrally geared when income and costs are roughly equal.

Negative gearing is not a special concession invented for property investors. It is the ordinary income tax principle that a loss from one income-producing activity can be offset against income from another. The same principle applies to shares, managed funds, and any other income-producing investment. Property draws the most attention because it is the asset class most Australians invest in outside superannuation.

2 How the Tax Deduction Is Calculated

The mechanics are straightforward. Add up the income your investment property generates, primarily rent, and subtract every allowable deduction. If the result is a loss, that loss reduces your taxable income from all sources.

Take a worked example on 2025-26 figures. You own an investment property in Brisbane that earns $28,000 a year in rent. Your total deductible expenses for the year come to $42,000, made up of mortgage interest, depreciation, property management fees, council rates, insurance, and repairs. Your net rental loss is $14,000.

On a salary of $130,000 a year, your taxable income without the property is $130,000. Apply the negative gearing loss and it falls to $116,000. Using 2025-26 tax rates, the difference in tax payable at this income level is roughly $4,900: the $14,000 loss is relieved at the marginal rate of 37 cents in the dollar, plus the 2% Medicare levy. That is a genuine cash saving, not a profit. You still paid $14,000 more in expenses than you earned in rent, and recovered $4,900 of it through lower tax.

Negative gearing reduces your tax bill. It does not erase your loss. The strategy only pays off if the property appreciates by more than the holding losses you accumulate along the way.

3 Key Deductible Expenses

Getting the deductible list right is what determines your net rental position. The Australian Taxation Office (ATO) allows these categories of deduction for investment properties:

Mortgage interest. The interest component of your investment loan repayments is fully deductible, and for a negatively geared property it is usually the single largest expense. Only the interest counts, not the principal repayment.
Depreciation. A non-cash deduction for the decline in value of the building structure (Division 43 capital works deduction) and the plant and equipment within it (Division 40 depreciation). It can enlarge a paper loss with no extra cash going out the door.
Property management fees. Fees paid to a licensed property manager, typically 7% to 10% of gross rent, are fully deductible, as are letting fees, lease renewal fees, and advertising costs incurred to find tenants.
Repairs and maintenance. The cost of keeping the property in its existing condition: plumbing repairs, repainting, fixing appliances, general upkeep. Improvements and renovations are treated differently, they are capital expenditure and depreciated over time rather than claimed immediately.
Insurance. Landlord insurance, building insurance, and contents insurance for fixtures and fittings are all deductible.
Council rates and water charges. Rates levied by the local council, along with water and sewerage charges paid by the owner, are deductible.
Land tax. Where it applies, land tax paid on an investment property is deductible.
Strata levies. For apartment and townhouse owners, regular strata levies are deductible, though not special levies for capital improvements.
Accounting and legal fees. Fees paid to an accountant to prepare your rental schedule or a solicitor to manage tenancy matters are deductible.
Loan costs. Some loan establishment costs, lenders mortgage insurance (where applicable), and bank charges can be deducted over the life of the loan.

What you cannot deduct immediately: stamp duty on acquisition, the purchase price itself, and capital improvement expenditure. These feed into your capital gains tax calculation when you eventually sell, but they cannot be offset against rental income year by year.

4 Negative Gearing vs Positive Gearing: The Core Difference

The choice between a negatively geared and positively geared property comes down to a trade-off between cash flow and capital growth.

Positively geared properties, where rental income exceeds all expenses from the outset, generate taxable income rather than a deductible loss. That improves your day-to-day cash flow but adds a tax obligation. Positive cash flow tends to show up in regional markets, mining towns, and higher-yielding property types such as dual-income dwellings, granny flat setups, or commercial property. It suits investors who need the portfolio to support itself without drawing on personal income.

Negatively geared properties usually mean higher-value assets in capital city or coastal markets, where strong long-term capital growth is the primary return driver. The investor accepts ongoing cash flow shortfalls in exchange for anticipated appreciation. It works best for investors with high incomes who can comfortably absorb the shortfall and benefit most from the tax offset.

Neither approach is inherently better. The right one depends on your income, tax position, risk tolerance, time horizon, and the specific property and market in question.

5 Who Benefits Most From Negative Gearing

The tax benefit of negative gearing scales directly with your marginal tax rate. Under Australia's 2025-26 individual tax brackets:

Taxable income $0-$18,200: 0% (tax-free threshold)
Taxable income $18,201-$45,000: 19 cents per dollar
Taxable income $45,001-$135,000: 32.5 cents per dollar
Taxable income $135,001-$190,000: 37 cents per dollar
Taxable income above $190,000: 45 cents per dollar

The Medicare levy of 2% applies on top of these rates for most taxpayers. A $10,000 rental loss is worth only $1,900 in tax savings to someone on the 19% rate, but $4,700 to someone on the 45% rate (plus Medicare levy). That is why negative gearing works hardest for high-income earners: lawyers, doctors, executives, and business owners earning above $135,000 per year get proportionally far greater tax relief from the same rental loss.

This has sat at the heart of the political fight over negative gearing's fairness. Critics say the strategy disproportionately benefits wealthy investors. Proponents counter that it is open to anyone, and that the tax benefit merely compensates for genuine economic losses being incurred in the provision of rental housing.

6 The Policy Debate: 2016, 2019, and Beyond

Negative gearing has been one of the most contested issues in Australian economic policy for over a decade. The sharpest challenge came in 2016, when the Labor Party under Bill Shorten announced a policy to limit negative gearing to new residential properties, with existing investments grandfathered. Labor also proposed reducing the capital gains tax discount from 50% to 25% for assets held longer than 12 months.

The policy went to the 2016 election and again to the 2019 election, where it became a defining issue. Labor's defeat in May 2019, widely referred to in media commentary as the "unlosable election", was put down in part to concerns about the property policy's impact on existing investors and on housing values more broadly. After that defeat, Labor largely stepped back from the negative gearing reform agenda.

The 2019 result settled the negative gearing debate for the medium term. The Coalition government's victory signalled that any major overhaul of the existing framework would meet significant electoral resistance. No major party has taken a substantive negative gearing reform policy to a federal election since, though the argument resurfaces whenever housing affordability is in the spotlight.

The 2019 election was, in practical terms, a referendum on negative gearing. Investors have run their numbers since then on the reasonable assumption that the existing framework holds, while knowing policy risk is never entirely absent from a long-term investment.

7 The Role of Depreciation Schedules

One of the most underused tools available to a property investor is the tax depreciation schedule, prepared by a qualified quantity surveyor. It identifies every deduction available under Division 40 (plant and equipment) and Division 43 (capital works) of the tax legislation, applied to your specific property.

Division 43 capital works deductions apply to the building structure itself and are available for residential properties constructed after 17 July 1985 at a rate of 2.5% per year for 40 years. A property that cost $350,000 to construct generates $8,750 per year in capital works deductions, a pure paper loss that requires no cash outflow.

Division 40 plant and equipment deductions cover the depreciable assets within the property: hot water systems, carpets, blinds, ovens, air conditioning units, and dozens of other items. Each is depreciated over its effective life as determined by the ATO. Newer properties with recently installed fixtures can throw off substantial plant and equipment deductions in the early years of ownership.

The practical effect is that depreciation can turn a property that is marginally positively geared on a cash flow basis into a firmly negatively geared one on paper, creating a tax deduction without any additional cash leaving your pocket. A quantity surveyor's depreciation schedule usually costs between $600 and $800, is itself tax-deductible, and almost always recovers its cost many times over in the first year. For a serious property investor it is not optional.

8 The Real Risks of Negative Gearing

The tax benefit can breed a false sense of security. The strategy carries genuine risks, and they need to be understood before you commit.

Reliance on capital growth. Negative gearing only comes out ahead if the property appreciates by more than the cumulative holding losses. If growth is flat or negative over your holding period, you have made a loss, partly offset by tax but a loss all the same. Not every property in every market delivers the capital growth the investment thesis assumes.
Cash flow pressure. A negatively geared property means topping up the gap between rental income and expenses from your personal income every single month. That is manageable while you are employed and earning a strong income. It turns serious if you lose your job, take extended leave, or face an unexpected reduction in income at the same time as rising costs.
Interest rate sensitivity. Mortgage interest is usually the largest component of a negatively geared investor's expense base. When rates rise sharply, as they did between May 2022 and November 2023, when the Reserve Bank increased the cash rate from 0.10% to 4.35% in just 18 months, holding costs jump. An investor who stress-tested their position at 2% above the rate they borrowed at in 2021 was still caught by the full extent of that cycle.
Vacancy risk. Rental income assumptions can be disrupted by vacancy. Even a few weeks empty each year dents your net return and widens the cash flow shortfall you must personally fund.
Legislative risk. Tax law can change. The 2019 election result provided comfort, but no investment strategy should rest entirely on the assumption that a particular tax concession will remain in place indefinitely.

9 When Negative Gearing Makes Sense, and When It Does Not

Negative gearing makes the most sense when all of the following conditions hold:

You are on a high marginal tax rate, ideally 37% or 45%, so the tax offset is material.
You have strong, stable income that can comfortably absorb the monthly cash flow shortfall without financial stress.
The property sits in a market with genuine, evidence-backed long-term capital growth drivers: population growth, infrastructure investment, constrained supply, employment diversity.
You have a long investment horizon of at least seven to ten years, giving the capital growth thesis time to outrun the accumulated holding losses.
You hold an adequate financial buffer to manage vacancy, interest rate rises, or unexpected maintenance without being forced to sell at an inopportune time.

It is a poor strategy when:

You are on a low or moderate marginal tax rate, leaving the tax offset too small to meaningfully reduce your holding cost.
The property is in a market with limited capital growth drivers, so the core thesis of the strategy is absent.
You cannot comfortably fund the monthly shortfall from your income without financial stress.
You need the investment to be self-funding from the outset because you cannot sustain ongoing top-ups.
You are close to retirement and cannot risk a holding period long enough for capital growth to outweigh accumulated losses.

A negatively geared property in a flat market is a loss-making investment with a partial tax rebate. The tax concession does not change the underlying economics; it only changes how much of the loss is subsidised by your other income.

How to Decide: A Practical Framework

Before committing to a negatively geared investment strategy, work through the following questions honestly and with real numbers.

Step 1: Calculate your true annual holding cost. Model the expected rental income for the property and subtract all realistic expenses: mortgage interest at current rates plus a 2% buffer, management fees, rates, insurance, repairs, and depreciation. The net figure tells you how much you will be funding out of pocket each year, before the tax benefit.

Step 2: Calculate your after-tax cost. Multiply your net rental loss by your marginal tax rate (including Medicare levy) to determine the tax saving. Subtract this from the pre-tax shortfall to find your true annual out-of-pocket cost. This is the price you pay each year for the capital growth option.

Step 3: Model the capital growth required to break even. Add up the after-tax holding costs over your intended holding period and determine what capital growth rate is required for the property to break even. Compare this to the historical and forecast growth rate for the specific market and property type. If the required growth rate is significantly higher than the market's track record, the strategy is speculative.

Step 4: Stress-test your serviceability. Model your cash flow position if your income dropped by 20%, if the property was vacant for eight weeks, and if the interest rate rose by a further 1.5%. Can you sustain the strategy through all three scenarios at once? If not, you are over-leveraged.

Step 5: Get professional advice. A good accountant can confirm your deductible expenses, make sure your depreciation schedule is in place, and model the tax outcomes for your specific income and circumstances. A buyer's agent can assess whether the specific property you are considering has the capital growth fundamentals to justify the holding costs. Neither step is optional for a serious investment decision.

Negative gearing is neither a guaranteed path to wealth nor a flawed policy to be dismissed. It is a specific strategy with specific conditions under which it works well. Applied to the right property, in the right market, by an investor with the right income and financial resilience, it is a legitimate and effective tool for building long-term wealth through property. Applied without rigour, it is simply a tax-assisted way to make a loss.

If you would like to discuss how negative gearing fits within your investment strategy, and whether the properties you are considering have the growth fundamentals to support it, we welcome the conversation.