Understanding Negative Gearing in Australia
Negative gearing is one of the most discussed — and debated — aspects of the Australian property investment landscape. It occurs when the total costs of owning and managing an investment property exceed the rental income the property generates. The resulting net loss is deductible against your other income, effectively subsidising part of the shortfall through the tax system.
Australia is one of only a handful of countries that allows unlimited negative gearing losses to be offset against unrelated income (such as salary). Many other countries require losses to be carried forward and only offset against future rental income, or cap the deduction amount. This feature makes negatively geared property particularly attractive to higher-income Australian earners, who benefit from a larger tax offset.
According to ATO taxation statistics, over 2 million Australians declare rental income and expenses each year, with approximately 1.3 million recording a net rental loss (i.e., being negatively geared). The total rental losses claimed run to tens of billions of dollars annually.
How the Tax Benefit Is Calculated
The tax benefit from negative gearing is simply the rental loss multiplied by your marginal tax rate (including Medicare levy). For example:
- Annual rental income: $26,000 (500/week × 52)
- Annual expenses: $38,500 (interest $28,000, rates $1,500, insurance $1,200, management $2,210, maintenance $1,000, depreciation $3,500, strata $1,090)
- Net rental loss: $12,500
- Tax benefit at 37% marginal rate: $12,500 × 37% = $4,625
- After-tax holding cost: $12,500 − $4,625 = $7,875 per year ($656/month)
In this example, the investor is paying $7,875 per year out-of-pocket to hold the property — the equivalent of a "top-up" from their own savings. The strategy is profitable only if the property's capital value increases by more than the cumulative holding costs over the investment horizon.
Deductible Rental Expenses
The ATO distinguishes between immediately deductible expenses and capital expenses (which are either depreciated over time or added to the cost base):
Immediately deductible (in the year incurred):
- Interest on the investment loan (but not principal)
- Council rates and land tax
- Water rates
- Building and landlord insurance premiums
- Property management fees (typically 7–10% of gross rent, plus GST)
- Repairs and maintenance (must be repairs to existing damage, not improvements)
- Pest control and garden maintenance
- Strata / body corporate fees
- Advertising costs for tenants
- Accounting and tax agent fees attributable to the property
Capital expenses — depreciated over time:
- Building construction costs (2.5% per year, Division 43 capital works)
- Plant and equipment: appliances, carpets, hot water systems, air conditioners (at ATO effective life rates)
- Capital improvements (e.g., new bathroom, kitchen renovation) — added to cost base; may attract Division 43 deductions
Depreciation — A Non-Cash Deduction
One of the most powerful aspects of property investment is the ability to claim depreciation as a tax deduction without spending money in that year. A quantity surveyor's depreciation schedule typically identifies $3,000–$10,000 in annual depreciation deductions for a typical investment property, effectively increasing the rental loss and the associated tax benefit without additional cash outlay.
For properties built after 16 September 1987, the building structure can be depreciated at 2.5% of the original construction cost per year (Division 43). For a property with a construction cost of $300,000, this produces an annual deduction of $7,500 — purely on the building structure, before any plant and equipment depreciation.
Note the 2017 rule change: for second-hand properties purchased after 9 May 2017, investors can no longer claim depreciation on pre-existing plant and equipment (e.g., carpets or appliances that were already in the property when they bought it). New plant and equipment installed by the investor themselves can still be depreciated.
Negative Gearing vs. Positive Gearing
A property is positively geared when rental income exceeds expenses, producing a taxable rental profit. Positive gearing means the property pays for itself (and then some) from day one — cash flow is positive. However, the profit is assessable income and subject to tax.
Negatively geared properties require an ongoing cash contribution from the investor, but this is partially offset by the tax benefit. The strategy fundamentally relies on capital growth to generate a profit over the long term. Our Capital Gains Tax Calculator can help you model the after-CGT proceeds when you eventually sell.
If you are buying an investment property, also factor in stamp duty as an upfront cost, and use our Mortgage Repayment Calculator to model your loan interest. The ATO provides comprehensive guidance on rental expenses you can claim.
Key Risks of Negative Gearing
Negative gearing is not without risk. Key risks to consider include:
- Interest rate risk: Rising interest rates increase borrowing costs and can significantly increase the rental loss. Many investors who geared heavily at low 2020–2021 rates found their losses blowing out as rates rose sharply in 2022–2023.
- Vacancy risk: A vacant property generates no rental income but all expenses continue. High vacancy periods can devastate the investment's cash flow position.
- Policy risk: Negative gearing rules could be amended in a future federal budget. Any limitation or removal of negative gearing would materially affect after-tax returns.
- Capital growth uncertainty: Property prices can fall as well as rise. If the property does not appreciate sufficiently, the investor may realise a loss on sale even after accounting for tax benefits.
- Concentration risk: Property is illiquid and tends to represent a large single exposure — far more concentrated than a diversified share portfolio.
Before investing in property, consult a licensed financial adviser to ensure the strategy aligns with your financial goals, risk tolerance, and cash flow capacity. This calculator is a tool for initial modelling only.