The ultimate guide to negative gearing: Pros, cons, and calculations

Terms such as depreciation, capital gains, and of course, negative gearing can sound confusing, particularly if you're unfamiliar with property investing. But negative gearing is pretty simple to understand once the jargon is stripped out, and it can save property investors tax.

So, what is negative gearing and how does it work? Here are the answers to many of the most common negative gearing questions.

What is negative gearing?

The definition of negative gearing can be broken down into its two components 'negative' and 'gearing'.

• Gearing means to borrow money and use it to invest. You can use gearing to invest in property, shares, or another vehicle entirely, but this article will focus on property investing.

Now we come to positive and negative gearing.

• A positively geared investor is one who is making more from their investments than they are spending to hold them.

• A negatively geared investor, on the other hand, is one who is losing money on their investment.Ergo, their interest expenses, maintenance costs, and other outgoings tally up to more than the rental income they're bringing in.

That's pretty easy, right? Well, where it gets more complicated is when considering the tax offset that goes by the same name.

How does negative gearing save tax?

A negatively geared investor can deduct certain costs they incur due to an investment property from their pre-tax income – which can include rental income and wages – in the same way an employee might deduct work expenses.

This means they may pay less income tax, even on income unrelated to their investment.

Let's use an example:

Damien has an investment property in Newcastle. It brings in $550 a week in rent – totaling $28,600 a year. He took out a $600,000 home loan to buy his property and makes interest only repayments of around $690 per week – or $35,900 a year.

Without considering other costs, like property management fees, insurance, and maintenance, he is $7,300 in the red each year on his investment.

He also earns a $100,000 annual salary, on which he would pay nearly $20,800 in income tax in the financial year 2025-26.

But, with negative gearing, he can subtract his $7,300 loss from his pre-tax income, leaving him with just $92,700 of taxable income, on which he would pay nearly $18,600 of tax – $2,200 less than he might have otherwise.

See also: Income Tax Calculator

If you're considering negative gearing, or you're currently losing money on an investment property and want to see where you might stand at tax time, you might find Your Mortgage's Negative Gearing Calculator useful.

Is negative gearing worth it?

Of course, Damien is still in the red. He has minimised his losses – he hasn't turned them into a profit.

By definition, a negatively geared asset is a cash flow drain and its owner will be losing money in the short term.

The highest marginal income tax rate a person can typically pay in Australia is 45% – or 45 cents of income tax for each $1 earned. Thus, a $10,000 loss can generally offset a maximum of $4,500 of income tax, leaving a $5,500 gap.

Negatively geared properties can bring in capital gains

But investors like Damien might still hold onto a loss-making property if they expect its value to grow over time.

Negative gearing can be more beneficial for high income earners

It's also worth noting that the higher your income, the more you can potentially save through negative gearing. Australia's tiered tax system means high-income earners generally pay a higher rate of tax and therefore receive a larger tax benefit from deducting investment losses.

Property investments often start out negatively geared

Finally, it's not uncommon for a property investment to start out being negatively geared. Then, as rents rise (typically due to inflation) and mortgage costs fall (often due to the principal balance being repaid), the tables may turn and a once-loss-making investment can eventually become positively geared.

Top home loans available for property investors right now

Whether you're positively geared or negatively geared, a competitive home loan can make a big difference to an investment's performance and profitability. Here are some of the lowest-rate investor home loans available right now:

Important Information and Comparison Rate Warning

Is it better to be positively geared or negatively geared?

Most investors who purchase property assumably hope to one day be positively geared. Negative gearing is a strategy used by many on their journey to owning a positively geared property.

As previously mentioned, a negatively geared property might save a person from paying some income tax, but the tax deduction can only ever reduce losses, it won't eliminate them.

It's common for a property investor to be negatively geared for a period of time after they purchase a property.

Many expect inflation will increase their rental income and the value of their property in the years to come. Meanwhile, the size of their home loan will likely remain the same or shrink, depending on whether they're making interest only repayments or principal and interest repayments.

Why don't people like negative gearing?

There's no denying negative gearing is controversial. Critics argue the tax discount makes the property market less fair.

Many believe that, since those on higher incomes have the most to benefit from the tax minimisation strategy, it leads them to spend more on property than they otherwise would. Therefore, property investors arguably inflate demand for properties, bidding up values and making it harder for less wealthy Australians to get into the housing market.

Negative gearing has been a political football for decades. In fact, it was briefly near-abolished in the 1980s. In more recent times, the Australian Labor Party lost two elections – in 2016 and 2019 – while promising negative gearing reforms.

Risks of having a negatively geared property

Owning a negatively geared property brings numerous risks, most relating to cash flow.

To be negatively geared means to be losing money, no matter how glittery the term might sound. If you're losing money week to week, vacancies or unexpected repairs can make that worse.

On top of that, negative gearing is politically contentious. While the electorate currently appears to favour negative gearing now, reforms have been floated before and could resurface in the future.

And that's all before considering the risks associated with investing in property to begin with.

Is Australia the only country with negative gearing?

Australia isn't the only place where property investors can negatively gear their properties. Similar systems exist in Germany, Japan, Canada, and Norway, each with their own intricacies.

Less generous tax deductions are applicable in the likes of France, the United States, and Ireland.

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