Negative gearing is one of Australia's most discussed investment strategies, allowing property and share investors to offset investment losses against their personal income. This comprehensive guide explains exactly how negative gearing works, who benefits most, and whether it's the right strategy for your financial situation in 2025.

What is Negative Gearing?

Negative gearing occurs when the costs of owning an investment exceed the income it generates. In simple terms, you're spending more money on your investment than you're receiving from it.

The key feature of Australia's tax system is that this investment loss can be offset against your other income sources, such as your salary. This reduces your taxable income and therefore your tax bill.

How Negative Gearing Works: Step-by-Step

Let's walk through exactly how negative gearing creates tax benefits using a practical example.

Step 1: Calculate Your Investment Loss

First, add up all your investment income and subtract all expenses:

Step 2: Offset Against Your Income

This $25,545 loss is deducted from your taxable income:

Step 3: Calculate Your Actual Cash Position

It's crucial to understand the difference between your paper loss and actual cash loss:

Positive vs Negative Gearing: Which is Better?

This is one of the most debated questions in property investing. Let's compare both strategies:

When Negative Gearing Makes Sense

• You're in a high tax bracket (37% or 45%)
• You expect strong capital growth (5%+ annually)
• You have stable, secure employment
• You have cash reserves for emergencies
• You're building long-term wealth (10+ year horizon)

When Positive Gearing Makes Sense

• You're in a lower tax bracket (19% or 32.5%)
• You want passive income now
• You're approaching retirement
• You want to build a larger portfolio faster
• You're risk-averse

Who Benefits Most from Negative Gearing?

The tax benefit of negative gearing depends entirely on your marginal tax rate:

Real-World Scenarios: Three Investor Profiles

Scenario 1: High Income Professional

Scenario 2: Middle Income Worker

Scenario 3: Lower Income Earner

What Expenses Create Negative Gearing?

Understanding which expenses are deductible helps you maximise your tax position:

1. Loan Interest (Largest Deduction)

Interest on investment loans is typically your biggest deduction. With current rates around 6-7%, a $500,000 loan generates $30,000-$35,000 in interest deductions annually.

2. Depreciation (Paper Deduction)

Depreciation is unique because it's a deduction without actual cash outlay. There are two types:

• Building depreciation: 2.5% of construction cost per year (buildings post-1987)
• Plant and equipment: Appliances, carpets, blinds, air conditioning

3. Property Management Fees

• Ongoing management: 6-8% of rent plus GST
• Letting fees: 1-2 weeks rent for new tenants
• Advertising costs

4. Rates and Insurance

• Council rates: $1,500-$3,000/year
• Water rates: $800-$1,500/year
• Landlord insurance: $1,000-$2,000/year
• Strata fees (units): $2,000-$8,000/year

5. Repairs and Maintenance

• Fixing broken items (immediate deduction)
• Replacing like-for-like (immediate deduction)
• General maintenance and upkeep

6. Other Deductions

• Land tax
• Pest control
• Gardening/lawn maintenance
• Bank fees and charges
• Accounting fees
• Legal costs (tenant disputes)
• Travel for inspections (limited)

Negative Gearing for Shares

Negative gearing isn't just for property - you can also negatively gear shares:

Shares vs Property for Negative Gearing

Risks and Downsides of Negative Gearing

The Break-Even Calculation

To determine if negative gearing is worthwhile, calculate your break-even capital growth rate:

When Negative Gearing Doesn't Make Sense

Negative gearing is NOT suitable for everyone. Avoid it if:

• You're on a low income (under $50,000): Tax savings are minimal
• You have no emergency fund: Can't handle unexpected costs
• Job security is uncertain: Need stable income to fund losses
• You're approaching retirement: Less time for capital growth
• You need cash flow now: Negative gearing drains money
• You can't handle volatility: Property markets fluctuate
• You're buying in low-growth areas: Capital growth is essential

The Future of Negative Gearing in Australia

Negative gearing has been a political hot topic for decades. Here's the current landscape:

Current Policy (2025)

As of January 2025, negative gearing remains fully available for all residential investment properties, both new and existing. There are no caps on the amount of losses that can be claimed.

Previous Reform Proposals

• 2019 Labor Policy: Proposed limiting negative gearing to new properties only (defeated at election)
• Grandfathering: Existing investors would keep current arrangements
• CGT discount reduction: Often discussed alongside negative gearing changes

What Could Change?

Frequently Asked Questions

What is the difference between negative gearing and capital gains?

Negative gearing is about annual cash flow (income vs expenses), while capital gains refer to the profit when you sell. You can be negatively geared annually but still make a profit overall through capital growth when you sell.

Can I negatively gear my home?

No. Negative gearing only applies to investment properties. Your primary residence is not an income-producing asset, so no deductions are available for mortgage interest or other costs.

Do I need to pay back the tax refund if I sell?

No, tax refunds from negative gearing are yours to keep. However, when you sell, you'll pay Capital Gains Tax on any profit, which partially "claws back" some of the tax benefit - particularly regarding depreciation claimed.

How do I claim negative gearing on my tax return?

Complete the rental property section of your tax return (or use a tax agent). You'll need records of all rental income, expenses, and a depreciation schedule from a quantity surveyor.

Is negative gearing worth it in 2025?

It depends on your personal circumstances - income level, property location, and investment goals. For high-income earners buying in growth markets, it can be effective. For lower income earners, positive gearing may be more appropriate.

What happens if my property becomes positively geared?

This is actually a good thing! It means your rental income now exceeds expenses, so you're making money. You'll pay tax on the profit, but you're building wealth without the cash drain.

Can I negatively gear multiple properties?

Yes, you can negatively gear as many properties as you can financially support. All losses are combined and offset against your other income. However, banks will consider your serviceability when lending for additional properties.