Negative gearing can sound like a loss-making strategy — but for the savvy property investor, it can offer strategic tax advantages and long-term capital growth. In this guide, we’ll walk through what negative gearing is, how it works, and how to make it benefit your property investment strategy.
What Is Negative Gearing?
Negative gearing occurs when the income from your investment property (usually rental income) is less than the total cost of holding the property — including interest on your loan, maintenance, insurance, and other ongoing expenses.
Put simply, your investment is running at a loss. But under Australian tax law, you can offset that loss against your other taxable income — such as your salary. This can significantly reduce the amount of tax you owe.
Positive vs. Negative Gearing
Let’s break it down:
- Positively geared: Rental income exceeds loan interest and expenses. The profit is taxable.
- Negatively geared: Rental income falls short of loan interest and expenses. The loss reduces your taxable income.
Although the property isn’t profitable short term, you may still gain from long-term capital growth while benefiting from tax deductions now.
ATO Definition and Deductible Expenses
According to the ATO, a property is negatively geared when your net rental income (after deductions and depreciation) is less than your loan interest. This net rental loss can be claimed against your income, reducing your tax liability.
Eligible deductible expenses typically include:
- Interest on investment loans
- Council and water rates
- Body corporate fees
- Depreciation (building and fixtures)
- Repairs and maintenance
- Insurance premiums
- Property management fees
- Advertising for tenants
You can also claim some borrowing costs, such as loan establishment fees and lender’s mortgage insurance (LMI), over time.
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Real-World Example: How It Works
Let’s consider Olivia, a graphic designer who recently purchased an investment apartment in a gentrifying suburb. Here’s how her numbers stack up:
- Annual rental income: $20,000
- Annual interest payments: $25,000
- Additional expenses (rates, insurance, repairs): $4,000
- Total annual loss: $9,000
Olivia applies this $9,000 loss against her taxable income. Assuming she’s in the 33% tax bracket, this results in a tax saving of around $3,000. While she’s still out-of-pocket by $6,000 annually, she’s banking on the property’s future capital growth to outweigh the short-term loss.
Check out “Crunching the Numbers: Positive Cash Flow vs. Negative Gearing“
Turning Negative into Positive Gearing
Over time, your negatively geared property could transition to being positively geared. This happens when:
- Your loan principal reduces, lowering interest payments
- Rental income increases
- Depreciation claims taper off as assets age
This shift means you’ll start earning more than you spend — but you’ll also begin paying tax on your net rental income.
How to Calculate a Negative Gearing Loss
Here’s how to assess whether your property is negatively geared:
- Calculate annual rental income
Multiply the weekly rent by 52. - Add up all deductible expenses
Include loan interest, maintenance, insurance, property management, etc. - Account for depreciation
Use a quantity surveyor to create a depreciation schedule outlining claimable amounts. - Subtract income from total expenses
If expenses exceed income, the property is negatively geared.
A qualified accountant can assist in fine-tuning these calculations to ensure you maximise deductions.
What Can You Claim as Deductions?
Investors can typically claim deductions in three key categories:
- Revenue expenses
These include ongoing costs like interest, management fees, and maintenance. - Capital works deductions
Covers structural improvements and long-term works depreciated over time. - Depreciable assets
Includes items like appliances, blinds, carpets, and other fixtures.
A full list of deductible expenses can be found via the ATO, but here are some examples:
- Loan interest and borrowing fees
- Pest control, cleaning, gardening
- Advertising for tenants
- Council rates and water charges
- Land tax and insurance
- Body corporate fees
- Repairs and maintenance
- Depreciation on plant and equipment
Check out “How to Increase Cashflow?: Go From Negative $3,000+/yr to $21,000+/yr Positive Cash Flow“
What Are the Risks of Negative Gearing?
While negative gearing can offer strategic tax advantages, it isn’t without risk. Ask yourself the following before diving in:
- Can I handle a cash flow shortfall?
You’ll need to cover the difference between rent and expenses from your own pocket. - What happens if the property is vacant?
A lack of rental income could stretch your finances, especially if vacancy is prolonged. - What if the property doesn’t grow in value?
If the market dips or stagnates, you may not achieve the capital growth needed to offset the losses. - Can I manage fluctuating interest rates?
Rising loan repayments can increase your out-of-pocket costs. - What if tax laws change?
Government policy can impact the benefits of negative gearing at any time.
These aren’t deal-breakers, but they require strategic planning. Work with a tax professional, financial adviser, and mortgage broker to build a safety buffer and stress-test your investment plan.
Is Negative Gearing Right for You?
Negative gearing is best suited to investors with:
- Sufficient cash flow to cover short-term losses
- A long-term investment horizon focused on capital growth
- A solid understanding of tax strategies
- Confidence in the property’s location and future performance
Used correctly, it can be a powerful lever for wealth creation — but it’s not a one-size-fits-all solution.
Negative gearing might look like a losing proposition on the surface, but when combined with smart planning, it can reduce your tax bill and set you up for future capital gains. Just make sure you’re financially equipped to manage the initial shortfalls and realistic about your investment’s growth prospects.
Before proceeding, always seek tailored advice from qualified professionals and conduct due diligence on the property’s location, demand, and projected rental income.
