Negative Gearing Explained: How It Works in Australia (2025-26 Guide)
Understand how negative gearing works in Australia. Learn the tax benefits, risks, and whether negatively gearing an investment property is worth it in 2025-26.
What is negative gearing and how does it work?
Negative gearing occurs when the costs of owning an investment property exceed the rental income it generates. The 'loss' on the property can then be deducted from your other taxable income — typically your salary — reducing the total tax you pay. **Simple example:** You earn $120,000 in salary and own a rental property that earns $25,000 in rent per year. Your property costs are: - Mortgage interest: $28,000 - Council rates: $2,500 - Insurance: $1,800 - Property management fees: $2,000 - Repairs and maintenance: $1,500 - Depreciation (building and fixtures): $8,000 - Other deductions: $1,200 - **Total costs: $45,000** Your rental loss is $25,000 - $45,000 = -$20,000. This $20,000 loss is deducted from your salary income, so your taxable income drops from $120,000 to $100,000. At a marginal tax rate of 37% (which applies from $90,001 to $135,000 in 2025-26), you save $20,000 × 37% = $7,400 in tax. You are still $12,600 out of pocket ($20,000 loss minus $7,400 tax saving), but the strategy relies on the property increasing in value over time — capital growth — to deliver a net positive return when you eventually sell. Negative gearing is not unique to property. You can negatively gear shares, managed funds, or any income-producing investment. However, property is by far the most common use because of the leverage (borrowing) involved.
Tax deductions you can claim on a negatively geared property
The ATO allows a wide range of deductions for rental property expenses. These fall into two categories: **Immediate deductions (claim in full in the year incurred):** - Mortgage interest (the biggest deduction for most investors) - Council and water rates - Landlord insurance and building insurance - Property management and letting fees - Advertising for tenants - Body corporate fees (for strata properties) - Repairs and maintenance (but NOT improvements — these must be depreciated) - Pest control, cleaning, and gardening - Legal expenses for lease preparation - Land tax - Travel to inspect the property (limited to 250 km one-way for certain circumstances) **Depreciation deductions (claimed over time):** - Building (capital works) depreciation: 2.5% per year on the construction cost for properties built after September 1987. On a property with $400,000 in construction costs, this is $10,000 per year for 40 years. - Plant and equipment (fixtures and fittings): items like carpet, blinds, hot water systems, air conditioners, dishwashers. Depreciated at varying rates — a hot water system might be depreciated over 12 years, carpet over 8 years. **Important:** For second-hand residential properties purchased after May 9, 2017, you can no longer claim plant and equipment depreciation on existing assets. You can only claim depreciation on new assets you install yourself. Building depreciation (capital works) is not affected by this rule. A quantity surveyor's depreciation schedule ($500-$800) is essential for maximising your depreciation deductions. It typically pays for itself many times over in the first year alone.
Negative gearing vs positive gearing: which is better?
**Negative gearing** means your property costs exceed your income — you make a cash loss each year but get a tax deduction. **Positive gearing** means your rental income exceeds your costs — you make a cash profit but pay tax on it. **Negative gearing is more common when:** - Interest rates are high (higher mortgage interest payments) - You have a large mortgage relative to the property value - The property is in a high-growth area with lower rental yields (Sydney, Melbourne inner suburbs) - You are in a high tax bracket (bigger tax benefit from the deduction) **Positive gearing is more common when:** - You have a small or no mortgage - The property is in a high-yield area (regional towns, mining towns) - Interest rates are low - You have owned the property for many years and rent has increased **Which is actually better?** Neither is inherently superior — the total return (rent + capital growth - costs - tax) is what matters. A negatively geared property in Sydney that grows 6% per year will outperform a positively geared property in a regional town that grows 1% per year, even though the Sydney property costs you money each year. However, negative gearing carries more risk. You are relying on capital growth that may not materialise. If property prices are flat for 5-10 years (as happened in Perth from 2014-2019), you are subsidising the property from your salary with no gain to show for it. Positive gearing puts cash in your pocket every week, regardless of what happens to property prices. The healthiest strategy for most investors is to start negatively geared (unavoidable with a new mortgage) and transition to positive gearing over time as rent increases and the mortgage reduces.
Is negative gearing worth it? The real maths
Many property spruikers oversell negative gearing by focusing only on the tax deduction. Let us run the real numbers on a typical scenario: **Scenario:** You buy a $750,000 investment apartment in Brisbane with a $600,000 mortgage at 6.5% interest. Rent is $550/week ($28,600/year). Your marginal tax rate is 37%. **Annual costs:** - Mortgage interest: $39,000 - Rates, insurance, strata: $7,500 - Property management (7%): $2,000 - Maintenance: $1,500 - Depreciation: $7,500 - **Total costs: $57,500** **Cash flow:** - Rental income: $28,600 - Cash costs (excluding depreciation): $50,000 - **Cash loss: -$21,400 per year** - Tax saving (loss of $28,900 × 37%): $10,693 - **Net cash loss after tax: -$10,707 per year** (or $206/week out of pocket) **For this to be 'worth it', the property needs to grow by:** $10,707 ÷ $750,000 = 1.4% per year just to break even. That is before selling costs (agent fees, CGT) and the opportunity cost of your deposit. Realistically, you need 4-5% annual growth to justify the cash drain. Brisbane has delivered 5-7% average growth over the past 30 years, so historically the numbers work — but past performance does not guarantee future results. **The bottom line:** Negative gearing is a legitimate tax strategy, but it is not free money. You are betting that capital growth will exceed your after-tax losses plus the opportunity cost of tying up your deposit. Run the numbers for your specific situation using our Negative Gearing Calculator before committing.
Negative gearing and capital gains tax (CGT)
Negative gearing and capital gains tax are closely linked because the whole point of wearing short-term losses is to benefit from long-term capital growth. When you eventually sell the property, you will pay CGT on the profit — but there is a significant discount: **The 50% CGT discount:** If you hold the property for more than 12 months (which almost all investors do), you only pay CGT on 50% of the capital gain. The other 50% is tax-free. **Example:** You buy for $750,000 and sell 10 years later for $1,100,000. Your capital gain is $350,000, but after the 50% discount you only add $175,000 to your taxable income in the year of sale. At a 37% marginal rate, the CGT is approximately $64,750. Over those 10 years, your accumulated negative gearing tax savings might total $80,000-$100,000. So the CGT on sale partially offsets those years of tax savings — but you still come out ahead if the property has grown enough. **Key planning tips:** - Sell in a financial year when your other income is low (e.g., if you take leave, reduce hours, or retire) - You can spread a capital gain by using a contract that settles in the next financial year - Keep records of all capital improvements (renovations, additions) — these increase your cost base and reduce your capital gain - Selling costs (agent fees, legal fees, advertising) are deducted from the gain Use our CGT Calculator to model different sale scenarios and see the after-tax profit from your investment property.
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General information and estimates only — not financial, tax, or legal advice. Always verify with a licensed adviser or the ATO.
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