Negative gearing is an investment strategy where the costs of owning a rental property — mortgage interest, maintenance, insurance, management fees, depreciation — exceed the rental income it generates. The resulting loss can be offset against your other taxable income (typically your salary), reducing your overall tax bill. It is one of the most widely used property investment strategies in Australia, but it is frequently misunderstood. This guide explains exactly how it works.
What Is Negative Gearing and How Does It Work?
A property is 'negatively geared' when the total costs of ownership are greater than the rental income it produces. The difference — the net rental loss — is treated as a tax deduction against your other income.
Example: You earn $120,000 PAYG salary. Your investment property generates $25,000 in annual rent. Your annual property costs are: mortgage interest $32,000, council rates $2,500, insurance $1,800, property management $2,000, maintenance $1,500, depreciation $8,000. Total costs: $47,800. Net rental loss: $47,800 − $25,000 = $22,800. Your taxable income reduces from $120,000 to $97,200 — saving approximately $8,436 in tax at the 37% marginal rate (including Medicare levy).
The strategy relies on two assumptions: (1) the tax saving plus rental income together reduce the true out-of-pocket cost of holding the property, and (2) the property will appreciate in value over time, delivering a capital gain that exceeds the cumulative holding costs. If property values do not grow — or fall — negative gearing can result in a genuine financial loss.
Negative Gearing Is Not Free Money
A common misconception is that negative gearing 'makes money'. It does not — it reduces the cost of a loss. If your property costs $22,800 more than it earns in rent, and the tax saving is $8,436, your actual out-of-pocket cost is still $14,364 per year. Negative gearing only generates a positive return if the property's capital growth exceeds this cumulative cost.
Tax Benefits: What You Can Claim and How Depreciation Works
The ATO allows investment property owners to claim a wide range of deductions against rental income. Interest on the investment loan is typically the largest deduction. Other claimable expenses include: council and water rates, landlord insurance, property management fees, repairs and maintenance (but not improvements), advertising for tenants, legal expenses related to tenants, pest control, and body corporate fees for units.
Depreciation is a significant non-cash deduction. Division 40 (plant and equipment) covers items like carpet, blinds, air conditioning, dishwashers, and hot water systems — depreciated over their effective life (typically 5–15 years). Division 43 (capital works) covers the building itself — depreciated at 2.5% per year for 40 years from the date of construction. For a property built at a cost of $400,000, Division 43 alone provides a $10,000 annual deduction.
Note: Since 2017, Division 40 depreciation on previously used assets (second-hand plant and equipment) in residential investment properties is no longer available to subsequent owners. Only the original purchaser of brand-new fixtures can claim Division 40. Division 43 (building structure) remains claimable regardless of when you purchased the property, provided the building was constructed after 15 September 1987.
- ✓Mortgage interest on the investment loan
- ✓Council rates, water rates, body corporate fees
- ✓Landlord insurance premiums
- ✓Property management and letting fees
- ✓Repairs and maintenance (not capital improvements)
- ✓Depreciation — Division 43 (building) and Division 40 (plant, if new)
- ✓Travel to inspect the property (limited since 2017)
- ✓Legal and accounting fees related to the investment
When Negative Gearing Does Not Work: Key Risks for Investors
Negative gearing fails when property values stagnate or decline. If you hold a negatively geared property for 10 years, spending $14,000 per year out of pocket (after tax benefits), your cumulative cost is $140,000. If the property has only grown by $100,000 in value, you have made a net loss of $40,000 — before selling costs and capital gains tax.
Interest rate risk is significant. A 2% rate increase on a $500,000 investment loan adds $10,000 per year in interest costs — increasing the annual shortfall. Many investors who purchased at low rates in 2020–2021 experienced significant cash flow stress when rates rose in 2022–2023.
Vacancy risk also erodes the strategy. Every week without a tenant costs the landlord the full weekly holding cost without any rental income offset. In some markets, vacancy rates have exceeded 3–4%, meaning investors can expect 2–3 weeks of vacancy per year.
Capital gains tax applies when you sell. If you have held the property for more than 12 months, you receive a 50% CGT discount — but the remaining gain is added to your taxable income in the year of sale and taxed at your marginal rate. On a $200,000 capital gain, the discounted gain of $100,000 could attract tax of $37,000–$47,000 depending on your other income.
Positive Gearing vs Negative Gearing
A positively geared property generates more rental income than its total costs — the investor earns a profit from day one. While you pay more tax (no loss to deduct), your cash flow is positive and you are not relying on capital growth to make the investment work. Many experienced investors prefer positive gearing for its lower risk profile and sustainable cash flow.
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About the Author
Sakib Manzoor
Senior Finance Wellness Expert
Sakib Manzoor is the founder of Secure Finance and brings extensive experience in Australian mortgage broking and financial wellness. Specialising in helping clients achieve their property finance goals through personalised strategies and expert guidance, Sakib is FBAA accredited and committed to providing clear, actionable advice. All content is written to meet Australian regulatory standards and is regularly updated to reflect current market conditions.