An Introductory Guide to How Negative Gearing Works in Australia

Estimated reading time: 10 minutes

Table of Contents

• What is Negative Gearing? A Simple Definition
• How is Negative Gearing Calculated? A Step-by-Step Process
• An Illustrative Example of Negative Gearing
• What Are the Risks of Negative Gearing?
• Key ATO Rules and Compliance for Investors
• The History and Debate Around Negative Gearing in Australia
• Is Negative Gearing Right for You?
• FAQs about Negative Gearing in Australia

What is Negative Gearing? A Simple Definition

In the context of australia negative gearing, negative gearing occurs when the total allowable tax deductions related to an investment property—like interest payments, property management fees, and repair costs—exceed the rental income that the property generates within a financial year. This results in a net rental loss.

On the surface, running a loss might sound like a poor financial decision. However, Australian tax law enables investors to use this net loss to reduce their taxable income from other sources, such as their regular salary. This often leads to a lower annual tax bill.

The core idea underpinning negative gearing in Australia is that investors are prepared to accept annual losses, confident that these will be outweighed by future capital gains—that is, an increase in the property’s value over time. While this approach is best known in the property sector, the principles are similar for other investment assets, such as shares purchased with borrowed funds, where costs exceed returns.

Negative gearing is a result of tax law, not an investment “strategy” in itself. It’s a financial position that can create significant benefits—and risks—depending on your circumstances and market conditions. For more details, see Understanding Property Tax Obligations.

How is Negative Gearing Calculated? A Step-by-Step Process

Step 1: Determine Your Net Rental Loss

Start by tallying all income from your investment property. Subtract all allowable, deductible expenses to arrive at your net result. Common deductible expenses listed by the ATO include:

• Loan interest (often the largest expense)
• Property management and agent fees
• Council and water rates
• Landlord and building insurance premiums
• Repairs, maintenance, and eligible improvements
• Strata and body corporate fees (for apartments)
• Depreciation (where eligible) and capital works deductions
• Other costs such as advertising for tenants

If your expenses surpass your total rental income, you have a net rental loss. This loss forms the basis for calculating your negative gearing benefits. To learn about maximising deductions, visit Maximizing Instant Asset Write-Off.

Step 2: Offset the Loss Against Other Income

Under the what is negative gearing principle, your net rental loss can often be claimed against your other income—for example, your employment income. Because the Australian tax system is progressive, higher-income earners may benefit more substantially, as each extra dollar saved in tax is at their top marginal rate. For an updated summary of deductible items, see Tax Deductions Guide 2025.

Step 3: Understand the Role of Capital Growth

Negative gearing investment property relies on the property increasing in market value over time. Losses experienced year-by-year are expected to be compensated by capital gains—the difference between your purchase price and future sale price. If held for over 12 months, you may be eligible for the 50% capital gains tax discount. More information is available at Pre-CGT Assets Tax Implications.

An Illustrative Example of Negative Gearing

Let’s consider a simple scenario to see how a negative gearing calculator might work in practice:

• Alex has a salary of $110,000 per year and owns an investment apartment.
• The apartment earns gross rental income of $24,000 for the year.
• Total deductible expenses come to $34,000 (including loan interest, costs, and depreciation).

Step-by-step breakdown:

1. Net Rental Loss: $24,000 (income) – $34,000 (expenses) = $10,000 loss
2. Adjusted Taxable Income: Salary is reduced by $10,000, so tax is now paid on $100,000 instead of $110,000.
3. Tax Benefit: At the 32.5% marginal tax rate (excluding Medicare), Alex reduces tax by $3,250.

Even after the tax deduction, Alex still has a cash flow shortfall for the year. In the end, making a profit with negative gearing explained depends entirely on long-term property value growth.

What Are the Risks of Negative Gearing?

Negative gearing can magnify both gains and losses. If you’re considering negative gearing in australia, it’s vital to understand the likely risks before you invest.

The Risk of Capital Stagnation or Loss

Profiting from negative gearing depends on capital growth. If property values stagnate or fall, annual losses can eat into your savings without upside from a future price increase.

The Risk of Negative Cash Flow

Owning a negatively geared property means consistent cash outflows. You need to cover the difference between rental income and expenses, often for years.

The Risk of Rising Interest Rates

Interest rates have a direct impact on your largest expense: loan repayments. Even modest rises can substantially increase out-of-pocket losses. For the latest on interest rates, see NAB Home Loan Rate Update.

The Risk of Legislative Change

Australian tax law changes over time. Rules about negative gearing investment property and the capital gains tax discount can be updated or restricted by future governments.

Key ATO Rules and Compliance for Investors

Not all losses are claimable. The ATO sets specific criteria:

• The property must be genuinely available for rent on a commercial basis, not just for occasional use.
• Deductions are only for expenses that directly relate to earning rental income.
• Detailed records and substantiation are required—keep all receipts and documentation.
• Rules have changed for depreciation. For residential properties purchased after 9 May 2017, you can no longer claim depreciation on previously used (second-hand) plant and equipment.

For up-to-date details, always check the ATO rental property guide.

The History and Debate Around Negative Gearing in Australia

Negative gearing explained is as much a policy debate as a tax rule. In the mid-1980s, negative gearing losses were “quarantined,” meaning they could not be offset against salary. The policy was quickly reversed after concerns about impacts on housing supply and rents.

Today, some argue that negative gearing enhances rental supply and helps ordinary Australians invest. Others say it skews the property market, favours high-income earners, and makes it harder for first-home buyers.

Whatever your view, negative gearing will remain a highly scrutinised part of investment property strategy in Australia.

Is Negative Gearing Right for You?

Whether you’re using a negative gearing calculator or analysing your situation with a professional, it’s important to assess:

• If you have sufficient income and buffers to manage annual losses
• Your expectations for capital growth in your chosen location
• How changes in law, lending markets, or your job/health might affect your ability to hold the property long-term
• The importance of seeking advice from a qualified tax agent or financial advisor before proceeding

Remember, negative gearing is a tax position, not a guarantee of investment success.

FAQs about Negative Gearing in Australia