How Negative Gearing Actually Works

Negative gearing is a description, not a plan. A rental property is negatively geared when the deductible costs of holding it exceed the rent it earns for the year. Those costs typically include the interest on the loan used to buy it, council and water rates, land tax, strata or body corporate fees, landlord insurance, property-management fees, repairs and maintenance, and depreciation. When the total of those exceeds the rental income, the property runs at a net rental loss for the year.

Under current Australian rules, that net rental loss can generally be offset against your other assessable income — most commonly salary or business income — which lowers your taxable income for the year. That offset is the whole of what “negative gearing” refers to. It is not a special scheme you opt into; it is simply the ordinary deductibility of expenses incurred in earning assessable income, applied to a property that happens to cost more to hold than it earns.

Within the tax return, the rental income and the deductible holding costs are brought together in a rental schedule for the property. If costs exceed income, the resulting net rental loss reduces your overall taxable income. Because Australia has a progressive tax system, the value of that reduction depends on your marginal tax rate — the same loss is worth more, in tax terms, to someone on a higher marginal rate than to someone on a lower one.

• Rental income is added up for the year
• Deductible costs — interest, rates, insurance, management, repairs, depreciation — are totalled
• Where costs exceed income, the net rental loss reduces other assessable income
• The tax saving equals the loss multiplied by your marginal rate, broadly speaking

Crucially, the tax saving only softens the cash shortfall — it does not eliminate it. You are still funding the gap between rent and costs out of your own pocket; the deduction returns a portion of it through a lower tax bill. The way these figures are captured is set out on our rental property tax page.

Consider an illustrative, rounded example — general information only, not a projection for any actual property. Suppose a property earns $30,000 in rent for the year, and the deductible holding costs — interest, rates, insurance, management and a depreciation claim — come to $40,000. The property is negatively geared by $10,000: that is the net rental loss.

If the investor has a marginal tax rate of, say, 37% plus the Medicare levy, the $10,000 loss might reduce their tax by a little under $4,000. The investor is still $10,000 down on cash for the year before tax; the deduction returns roughly $4,000 of it, leaving an after-tax holding cost of about $6,000. Whether that is worthwhile depends entirely on whether the property’s capital growth and any future income are expected to more than make up that $6,000 a year over the holding period. The numbers here are purely illustrative and depend on your marginal rate, the actual costs and the relevant rules.

The central risk is straightforward: a negatively geared property loses money every year it is held, and the strategy only works if capital growth eventually exceeds the accumulated after-tax losses. Capital growth is not guaranteed, and it can be slow, flat or negative for long stretches. A deduction worth a fraction of the loss is small comfort if the property does not appreciate.

Cash flow is the second risk. The shortfall has to be funded from other income every year, and rising interest rates, a vacancy, or an unexpected repair can widen it suddenly. Gearing magnifies both gains and losses. There is also a concentration risk in tying up borrowing capacity and cash in a single, illiquid asset. None of this makes negative gearing wrong — it makes it a position that has to be entered deliberately, with the cash flow stress-tested, rather than chased for the tax deduction alone.

Everything above reflects the position under current law. It is important to separate that from what has been announced but not legislated. In the 2026-27 Federal Budget, the Government announced proposed changes to negative gearing and capital gains tax settings. As general information: those announcements are not yet law, and are intended to apply from 1 July 2027 if they are enacted in their announced form.

Announced measures are not settled rules. They can be amended during the legislative process, deferred, or not proceed at all, and the detail that ultimately becomes law can differ from the announcement. For that reason, a decision should not be made on the assumption that an announced change either will or will not apply. We confirm the current position and the status of any announced change before any decision is made, so the plan is built on the law as it actually stands at the time — see our property investor strategy page for how this is handled inside an engagement.

Negative gearing cannot be judged in isolation. It interacts with your marginal tax rate, your cash-flow capacity, the loan structure and purpose, depreciation and its effect on the eventual capital gains cost base, land tax, the ownership structure, and the status of any announced law change. A sensible decision weighs all of that against your timeframe and your alternatives for the same capital — and treats the tax deduction as one factor among many, never the reason to buy.

We model the full picture from your actual figures as part of a property-investor engagement, working with your property-investor accountant and, where you want it, the investment property loan side as well. To talk it through for your situation, get in touch.

This guide is general information only and does not take into account your objectives, financial situation or needs. It is not personal tax advice and does not promise any particular tax outcome or saving. Tax treatment depends on your circumstances and on the law for the relevant income year, including the status of any announced but not-yet-enacted changes. Seek personal advice scoped to your situation before acting.