Negative Gearing Explained: How It Works in Australia (2025-26)

Bottom line? Negative gearing occurs when the costs of owning an investment property — including mortgage interest, maintenance, insurance, council rates, property management fees, and depreciation — exceed the rental income it generates. The resulting loss can be offset against your other income, such as your salary, reducing your overall taxable income and therefore your tax bill.

For example, if your investment property earns $25,000 in rent per year but costs $35,000 to hold (including $28,000 in interest and $7,000 in other expenses), you've a $10,000 loss. If your marginal tax rate is 37%, this loss reduces your tax by $3,700. Australia is one of only a few countries that allows unlimited negative gearing against all forms of income, making it a popular strategy among property investors.

The tax benefit of negative gearing is directly proportional to your marginal tax rate. Higher income earners benefit more because their marginal tax rate is higher.

At the 45% marginal rate (income over $190,000), a $10,000 rental loss saves $4,500 in tax. At the 30% rate ($45,001 to $135,000 under 2025-26 brackets), the same loss saves $3,000. At the 16% rate ($18,201 to $45,000), it saves only $1,600.

This progressive benefit means negative gearing is most advantageous for high-income earners, which is one reason it has been politically contentious. When you complete your tax return, you declare your rental income and deductible expenses on a rental property schedule. The net loss is then subtracted from your total taxable income before tax is calculated.

So what does this actually mean? Deductible expenses on an investment property include mortgage interest (the largest component for most investors), property management fees, council and water rates, landlord insurance, repairs and maintenance, pest control, gardening and lawn mowing for the rental property, advertising for tenants, legal fees related to the tenancy, body corporate fees for units, land tax, and travel expenses for property inspections in some cases. Depreciation is also a significant deduction — you can claim the decline in value of the building structure (at 2.5% per year for properties built after 1987) and the fixtures and fittings within the property (such as carpets, blinds, and appliances) at their applicable depreciation rates.

A quantity surveyor's depreciation schedule typically costs $600 to $800 and can identify $5,000 to $15,000 in annual depreciation deductions.

A property is positively geared when rental income exceeds all holding costs, generating a net profit. While negatively geared properties provide a tax deduction, positively geared properties put money in your pocket from day one — but you pay tax on the net rental income at your marginal rate.

The choice between the two depends on your investment strategy and financial situation. Negative gearing is typically pursued by high-income earners looking for tax deductions and banking on long-term capital growth. Positive gearing suits investors who want cash flow and are in lower tax brackets or approaching retirement.

Many properties transition from negatively geared to positively geared over time as rents increase while fixed-rate mortgage payments stay the same. A property yielding 3% gross in a capital city might be negatively geared at buy but positively geared within five to seven years as rents grow. That catches a lot of people off guard.

In plain English: Negative gearing remains one of Australia's most debated tax policies. Critics argue it inflates property prices by encouraging investment demand, benefits wealthy Australians disproportionately, and costs the federal budget billions in foregone tax revenue each year.

The Grattan Institute and other think tanks have recommended limiting or removing negative gearing to improve housing affordability. The Labor Party took a policy of limiting negative gearing to new properties to the 2019 election but lost, and subsequent policy proposals have been more modest. Supporters argue negative gearing increases rental housing supply, keeps rents lower than they would otherwise be, and provides a legitimate investment incentive for ordinary Australians building wealth for retirement.

The debate continues, and any changes would likely be grandfathered to protect existing investors.

Negative gearing is not a strategy in itself — it's a consequence of holding costs exceeding rental income. The real investment case should be based on total returns: rental yield plus capital growth, minus all costs including tax.

A property that delivers strong capital growth of 6% to 8% per year can be an excellent investment even if it's negatively geared, as the capital gain on a $600,000 property at 7% growth is $42,000 per year — far exceeding the annual holding loss. Use our Negative Gearing Calculator to model the after-tax cost of holding an investment property, and our Rental Yield Calculator to assess cash flow. Always consider whether you can comfortably fund the negative cash flow gap from your salary without financial stress, and have a buffer for vacancies and unexpected repairs.