What Is Negative Gearing and How Does It Work?

Did you know nearly 70 per cent of people with negatively geared property had a taxable income of less than $80,000 per year? Negative gearing represents a significant investment strategy in the Australian property market, with over 1.9 million people earning rental income in 2012-13.

When investors discuss negative gearing, they refer to a situation where the costs of owning an investment property exceed the income it generates. In essence, this results in a taxable loss that can be deducted from other sources, such as salaries or wages, resulting in significant tax savings. Although approximately 1.3 million Australian property investors reported a net rental loss, many deliberately pursue this strategy for its tax benefits. The most important advantage of negative gearing is that any net rental loss incurred during the financial year may be offset against other income, therefore reducing the investor’s overall tax liability.

This article explains what negative gearing means, how it works in the Australian context, and the potential benefits and risks that come along with this investment approach. Additionally, readers will discover when negative gearing makes financial sense and how to determine if this strategy aligns with their investment goals.

What is Negative Gearing and How Does It Work?

Negative gearing is a financial strategy where an investor borrows money to purchase an asset, and the income generated from that asset is less than the expenses associated with maintaining it. While this term doesn’t appear in tax legislation, it commonly describes a situation where an investor deliberately creates a loss on their investment property.

Simply put, gearing means borrowing to invest. When rental income is not enough to pay for costs like insurance, maintenance, property management fees, and mortgage interest, an investment property is said to be negatively geared. For instance, if an investor earns £25,000 in annual rent but spends £35,000 on property expenses, they face a £10,000 loss.

Contrary to what might seem counterintuitive, investors specifically pursue this strategy because the loss can be offset against their taxable income. Furthermore, approximately 1.3 million Australians reported a net rental loss in the 2012-13 financial year.

Conversely, positive gearing occurs when rental income exceeds expenses, resulting in a profit. Between these two scenarios exists neutral gearing, where income and expenses are roughly equal.

Beyond property, negative gearing can also apply to other investments, such as shares, where the dividend income is less than the interest on the loan. Notably, in 2012-13, about 270,000 people deducted over $1.83 billion for expenses related to earning dividend income.

Most investors accept short-term losses because they anticipate long-term capital growth that will ultimately outweigh these temporary shortfalls.

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Tax Benefits and Financial Implications of Negative Gearing

The primary advantage of negative gearing lies in its substantial tax benefits. Property investors can deduct their net rental losses against other income sources, consequently reducing their taxable income. For instance, if an investor with a salary of £85,000 incurs an annual property loss of £10,000, their taxable income drops to £75,000.

Moreover, investors carrying a property at a loss can potentially receive a tax refund at year-end. Higher income earners may even move down a tax bracket through these deductions.

Property expenses that qualify for tax deductions include:

• Loan interest payments
• Property management fees
• Maintenance costs
• Council rates
• Insurance premiums

Depreciation plays a crucial role as it adds to total loss without requiring actual cash expenditure. Indeed, these “non-cash” deductions can transform a paper loss into a cash gain.

For long-term holdings, the Capital Gains Tax (CGT) discount offers additional benefits. A 50% CGT discount is applied to properties owned for more than a year, which reduces the taxable capital gain at sale by half.

Nevertheless, negative gearing isn’t always a deliberate strategy—sometimes interest rates and expenses increase faster than rental income. Losses may be rolled over to later income years if they exceed current rental income.

Investors should note that, at the current top marginal tax rate, including the Medicare levy (47%), they save approximately 47 pence in tax for every pound lost on holding their property.

Risks, Considerations, and When It Makes Sense

Despite the tax advantages, negative gearing carries significant risks that investors must evaluate carefully.

Cash flow strain remains the foremost concern, as investors must cover ongoing losses out of pocket. In 2022-23, profits from investor-owned rentals plummeted 73%, with net rental income falling from nearly AUD 9.02 billion to less than AUD 2.45 billion. This decrease occurred primarily due to rising interest rates, with average rates for property investors jumping to 5.7% in 2022-23, up from just 3.4% the previous year.

Vacant properties magnify these losses, whereas unexpected maintenance costs or council rate increases can further diminish returns. Simultaneously, since negative gearing relies heavily on future capital appreciation, stagnant or declining property markets pose substantial hazards—particularly if investors are forced to sell during downturns.

Interestingly, the Australia Institute’s data reveals that negative gearing primarily benefits wealthy investors. The top 10% of wage earners will receive over AUD 4.43 billion in tax breaks from negative gearing in 2025-26, compared to just AUD 232.41 million for the bottom 10%.

Negative gearing typically works best as a long-term strategy (7- 10+ years), allowing time for capital growth. Accordingly, suitable candidates include those with:

• Stable, high incomes to absorb losses
• Sufficient financial buffers for rate increases
• Capacity to select properties in premium locations with proven growth potential

Conclusion – Negative Gearing

Negative gearing represents a significant investment strategy for many Australians, particularly those seeking long-term financial benefits through property investment. Though seemingly counterintuitive at first glance, this approach offers substantial tax advantages when investment expenses exceed rental income. Investors can effectively reduce their taxable income by offsetting these losses against other earnings, potentially receiving tax refunds and moving to lower tax brackets.

The strategy extends beyond property to other investments such as shares, where similar principles apply. Most negatively geared investors accept short-term financial losses because they anticipate future capital growth will ultimately deliver worthwhile returns. Additionally, benefits such as the 50% Capital Gains Tax discount for properties held for longer than 12 months enhance the long-term appeal of this approach.

Nevertheless, negative gearing carries significant risks that require careful consideration. Cash flow pressure remains the primary concern, especially during periods of rising interest rates or property vacancies. The strategy typically works best for investors with stable, high incomes and sufficient financial buffers who can commit to holding properties for 7-10 years or longer.

Ultimately, while negative gearing offers notable tax benefits, its suitability depends on individual financial circumstances, risk tolerance, and investment timeframes. Potential investors should therefore carefully assess their personal situation, considering both the short-term cash flow implications and long-term growth prospects, before adopting this strategy. The success of negative gearing hinges on selecting properties with strong appreciation potential and maintaining the financial capacity to weather temporary losses.