Negative gearing is one of the most talked-about, and most misunderstood, concepts in Australian property. It gets framed as either a magic tax trick or a reckless gamble, and it’s neither. Here’s what it actually is, how investors genuinely use it, and the honest trade-offs, with a Canberra example to ground it.
What negative gearing actually means
“Gearing” just means borrowing to invest. A property is negatively geared when the annual costs of holding it, principally the loan interest, plus maintenance, rates, insurance, and management fees, add up to more than the rent it brings in.
That shortfall is a loss on paper. Under current Australian tax rules, that loss can be deducted against your other income (like your salary), lowering your overall taxable income, and therefore your tax bill.
So the investor runs the property at an annual cash loss, but recoups part of that loss through tax savings, and, critically, bets that the property’s value will grow enough over time to more than make up for the ongoing shortfall.
A worked Canberra example
Suppose an investor buys a Canberra apartment and, in a given year:
- Rental income: $26,000
- Loan interest: $32,000
- Other costs (rates, insurance, management, maintenance): $6,000
- Total costs: $38,000
The property runs at a $12,000 loss for the year ($38,000 costs minus $26,000 income). That $12,000 loss can be deducted against the investor’s salary. If they’re on a 37% marginal tax rate, that deduction saves them roughly $4,440 in tax.
So the real out-of-pocket cost isn’t $12,000, it’s closer to $7,560 after the tax benefit. The investor carries that cost in the expectation that the property grows in value by more than that over time.
Why investors use it
The logic is straightforward: negative gearing makes holding a growth asset more affordable while you wait for capital growth. The tax benefit reduces the holding cost, and if the property appreciates faster than the after-tax shortfall accumulates, the investor comes out ahead when they eventually sell (or the property becomes positively geared as rents rise).
It’s most attractive to investors on higher marginal tax rates, since the deduction is worth more the higher your tax bracket.
The honest risks
Negative gearing isn’t free money, and it carries real risks:
- It relies on capital growth. If the property doesn’t appreciate, you’ve simply lost money each year with no upside. The tax benefit softens the loss but doesn’t erase it.
- You need cash flow to fund the shortfall. You’re covering a real out-of-pocket cost every year. If your income drops, that becomes a strain.
- Rate rises increase the shortfall. Higher interest means bigger losses, and a bigger cash-flow demand.
- Tax rules can change. Negative gearing has been politically contested for years. Current rules apply now, but policy can shift.
A property that’s negatively geared today may become positively geared over time as rents rise, which changes the tax picture. If you’re weighing an investment purchase, our investment property loan options are the place to start. Structuring the loan well from the start matters, see how loan structure affects investors.
Wondering how negative gearing would work for your situation? A 15-minute strategy call runs the numbers for your income, tax position, and goals, so you can see the real picture.
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Negative vs positive gearing
The counterpart is positive gearing, where the rent exceeds the costs, so the property makes a profit each year. That profit is taxable, but the property pays its own way and generates income.
Neither is universally better. Negative gearing suits investors chasing capital growth who can fund a shortfall and benefit from the tax deduction. Positive gearing suits investors who want income and cash flow over maximum growth. Many portfolios hold a mix.
A common misunderstanding is that negative gearing is the goal. It isn’t, it’s a by-product of borrowing to hold a growth asset. No sensible investor sets out to lose money each year purely for a tax deduction; the deduction only ever returns a fraction of the loss (your marginal tax rate), so you’re still out of pocket overall on the annual cash flow. The point of the strategy is the capital growth; the gearing and its tax treatment simply make holding the asset more affordable while that growth accrues.
The bottom line
Negative gearing is a legitimate, widely-used strategy where an investment property runs at a loss that’s offset against your income, in the expectation that capital growth outweighs the ongoing shortfall. It works best for higher-income investors with the cash flow to fund the gap and a long enough horizon for growth to play out. But it depends on that growth, and it isn’t right for everyone. Get advice specific to your situation before relying on it.
To see how it applies to you, book a 15-minute strategy call with Harbir.
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Or call 0461 117 777 | Email info@creditstar.com
Frequently Asked Questions
Q1. What is negative gearing?
Ans. When the costs of owning an investment property (mainly loan interest) exceed the rental income, creating a loss. That loss can be deducted against your other taxable income, reducing your tax bill.
Q2. How does negative gearing save tax?
Ans. The annual loss on the property is deducted from your other income, like your salary, lowering your taxable income. The tax saved depends on your marginal rate, higher earners benefit more.
Q3. Is negative gearing worth it?
Ans. It can be, if the property’s capital growth outweighs the after-tax annual shortfall. It relies on growth, so it suits investors with a long horizon and the cash flow to fund the loss.
Q4. What’s the difference between negative and positive gearing?
Ans. Negatively geared properties run at a loss (offset against income for tax). Positively geared properties make a profit (which is taxable but generates cash flow). Each suits different investor goals.
Q5. Who benefits most from negative gearing?
Ans. Investors on higher marginal tax rates, since the deduction is worth more, who expect strong capital growth and can comfortably fund the annual shortfall.
Q6. What are the risks of negative gearing?
Ans. It relies on capital growth (no growth means a real loss), requires cash flow to fund the shortfall, gets worse if rates rise, and depends on tax rules that could change.
Q7. Can a property become positively geared over time?
Ans. Yes. As rents rise and the loan is paid down, a negatively geared property can shift to positive gearing, changing its cash flow and tax treatment.
Q8. Does negative gearing mean I’m losing money?
Ans. On an annual cash basis, yes, you’re covering a shortfall. The strategy relies on capital growth exceeding that accumulated shortfall so you profit overall when you sell.
Q9. Is negative gearing going to be abolished?
Ans. It’s been politically debated for years but remains in place under current rules. As with any tax policy, it could change, which is a risk to factor into long-term planning.
Q10. Should I negatively gear my investment property?
Ans. It depends on your income, tax position, cash flow, and growth expectations. It’s a legitimate strategy but not universally right, get tailored advice before committing.
This guide is general information only and doesn’t take into account your personal situation, and it isn’t tax or financial advice. Tax treatment depends on your circumstances and can change, consult a registered tax agent or financial adviser. For your loan, book a call with Harbir Hundal, Credit Representative 506564 of BLSSA Pty Ltd ACN 117 651 760, Australian Credit Licence 391237.
