Negative Gearing Explained: How It Works in Property Investment

Investment Loans

8 Oct

Negative gearing is one of those terms you hear a lot in property circles and on the news. Put simply: negative gearing happens when the costs of owning an investment property - most commonly the interest on the loan - are greater than the rental income you receive.

That shortfall creates a net rental loss that you may be able to offset against your other taxable income. This article explains how it works in practice, what tax rules to be aware of, and the main benefits and risks for Australian property investors.

What counts as a deduction and how the tax benefit works

When a property is negatively geared you can usually claim many of the property’s allowable expenses as deductions in your tax return. The Australian Taxation Office lists typical deductible items as: mortgage interest, property management fees, repairs and maintenance, insurance, council rates and depreciation where eligible.

The net rental loss reduces your taxable income in the year it occurs which can lower the tax you pay that financial year. Keep in mind the ATO expects accurate records and proper allocation if a loan is used for mixed purposes.

A simple example

Imagine rent of $25,000 a year but total expenses including interest and fees of $35,000 a year. That $10,000 loss can be used to reduce the rest of your taxable income. The immediate benefit is the tax saving from reducing assessable income. Many investors accept short-term cash losses because they expect capital growth over the long term and a tax refund each year while they hold the property.

Capital gains tax and the longer-term picture

Negative gearing is often used alongside a buy and hold approach. If the property increases in value you may pay Capital Gains Tax when you sell. Australian resident individuals are commonly eligible for a 50 percent CGT discount if they have owned the asset for more than 12 months, which reduces the taxable capital gain. That potential post-sale gain is a core reason investors accept short-term losses today.

How borrowing and cashflow affect borrowing capacity

Because negative gearing creates an out-of-pocket cash shortfall you need the income or savings to cover the gap. Lenders will look at net rental loss when assessing your ability to service loans, so a negatively geared property can reduce how much extra you can borrow. Rising interest rates amplify the risk because interest makes up the largest single cost for most investors.

Policy debate and recent developments

Negative gearing is politically and publicly contentious. Critics say it disproportionately benefits higher income earners and can inflate property prices. Proposals and reports in 2025 have put reforms back on the agenda and examined options such as limiting negative gearing or changing the CGT discount for additional properties. Proposals vary and any change would have transitional rules and timeframes, so staying informed is important if your strategy depends on these concessions.

Main risks to weigh up

Short-term cashflow risk: You must cover the deficit each year.
Interest rate risk: Higher rates increase your loss and reduce cashflow.
Policy risk: Changes to tax settings could affect the attractiveness of the strategy.
Market risk: Capital growth is not guaranteed and selling costs and taxes can reduce returns. These are the main reasons negative gearing suits investors with stable finances and a long-term horizon.

Conclusion

Negative gearing is a tax treatment not an investment guarantee. It can reduce tax in the years you hold a loss-making investment and work well as part of a long-term strategy that relies on capital growth and the CGT discount.

At the same time it creates cashflow pressure, is sensitive to interest rates, and sits inside an active policy debate that could change the rules. If you are considering negatively gearing a property make sure you understand the likely annual shortfall, how that affects your borrowing capacity, and how a sale would be taxed under current rules.