Negative gearing is one of those terms that gets thrown around at every barbecue, in every property seminar, and across every election campaign. But when you press most people on how it actually works — the dollar amounts, the real after-tax cost, the break-even growth rate — the answers get vague fast. This guide puts concrete numbers behind the strategy so you can decide whether it genuinely makes sense for your situation.
In this article
- What Negative Gearing Actually Is
- How the Tax Deduction Works
- Cash Flow Example: A $600K Investment Property
- The Real Cost vs the Perceived Benefit
- When Negative Gearing Makes Sense
- When Negative Gearing Doesn't Make Sense
- Positive Gearing as an Alternative
- Policy Risk: What If It Gets Reformed?
- Key Takeaway: Growth Suburb Selection Matters More
What Negative Gearing Actually Is
Negative gearing is not a special tax concession or loophole. It is simply the result of a general principle in Australian tax law: if you borrow money to earn income, the costs of borrowing are tax-deductible. When those deductible costs exceed the income the asset produces, you have a net loss — and that loss can be offset against your other income, reducing your total taxable income.
In property terms, you are negatively geared when the annual costs of owning an investment property (mortgage interest, council rates, insurance, maintenance, property management fees, depreciation) exceed the rental income it generates. The resulting loss reduces your taxable income, which means you pay less income tax.
A simple example: you earn $120,000 from your job. Your investment property earns $25,000 in rent but costs you $35,000 in deductible expenses. That $10,000 loss is subtracted from your salary, so the ATO taxes you on $110,000 instead of $120,000. At the 37% marginal rate (for the 2025-26 financial year), that saves you $3,700 in tax.
The critical point most people miss: You lost $10,000 to save $3,700 in tax. Negative gearing does not "make money" — it reduces the after-tax cost of a loss. You are still out of pocket. The strategy only works if the property's capital growth over time more than compensates for the annual cash losses.
How the Tax Deduction Works
The tax benefit of negative gearing depends entirely on your marginal tax rate. Australia uses a progressive tax system, meaning different portions of your income are taxed at different rates. For the 2025-26 financial year (which applies the Stage 3 tax cuts that took effect 1 July 2024), the individual tax brackets are:
| Taxable Income | Marginal Rate |
|---|---|
| $0 – $18,200 | 0% |
| $18,201 – $45,000 | 16% |
| $45,001 – $135,000 | 30% |
| $135,001 – $190,000 | 37% |
| $190,001+ | 45% |
The size of your tax saving from a negatively geared property is your net rental loss multiplied by your marginal tax rate. This means the same $10,000 loss produces very different outcomes depending on your income:
| Taxable Income | Marginal Rate | Tax Saved on $10K Loss |
|---|---|---|
| $40,000 | 16% | $1,600 |
| $90,000 | 30% | $3,000 |
| $150,000 | 37% | $3,700 |
| $220,000 | 45% | $4,500 |
At a 16% marginal rate, you are spending $10,000 to save $1,600 — an after-tax cost of $8,400 per year. At the top marginal rate, the same loss costs you $5,500 after tax. The tax system reduces the pain, but it never eliminates it. You are always out of pocket with a negatively geared property unless capital growth or eventual positive cash flow compensates.
Cash Flow Example: A $600K Investment Property
Let's work through a realistic scenario using mid-2026 market conditions. The RBA cash rate sits at 3.85% as of May 2026 after a series of cuts from the 4.35% peak. Variable mortgage rates for investors are typically 1.5–2.5 percentage points above the cash rate.
The property
| Item | Amount |
|---|---|
| Purchase price | $600,000 |
| Deposit (20%) | $120,000 |
| Loan amount | $480,000 |
| Interest rate (investor variable) | 6.50% |
| Gross rental yield | 4.5% ($27,000/yr) |
Annual income and expenses
| Item | Annual Amount |
|---|---|
| Gross rent | $27,000 |
| Less: Property management (7% + GST) | -$2,079 |
| Less: Council rates | -$1,800 |
| Less: Water rates | -$900 |
| Less: Insurance (landlord) | -$1,400 |
| Less: Maintenance and repairs | -$1,500 |
| Less: Strata/body corp (if applicable) | $0 |
| Net rental income | $19,321 |
| Item | Annual Amount |
|---|---|
| Interest on loan ($480K at 6.50%) | $31,200 |
| Depreciation (building + fixtures estimate) | $6,000 |
| Total deductible expenses | $37,200 |
The net position
Cash loss before tax
Net rental income ($19,321) minus interest ($31,200) = -$11,879 per year in cash out of pocket. Note: depreciation is a non-cash deduction, so your actual cash shortfall is $11,879, not $17,879.
-$11,879/yr cash out of pocketTax deduction
Total deductible expenses ($37,200 including depreciation) minus rental income ($19,321) = $17,879 net rental loss. For someone earning $150,000, this saves $6,615 in tax (37% marginal rate).
$6,615 tax refundTrue after-tax cost
Cash out of pocket ($11,879) minus tax refund ($6,615) = $5,264. That is your real annual cost of holding this property. You are paying $101 per week out of your own pocket after the tax benefit is factored in.
$5,264/yr or $101/week after taxIf this property grows at 6% per year, it would appreciate by $36,000 in year one — well above the $5,264 after-tax holding cost. At 3% growth, the appreciation is $18,000, still comfortably above cost. At 0% growth or in a flat market, you are simply losing $5,264 per year with nothing to show for it except a tax deduction that does not cover the loss.
The Real Cost vs the Perceived Benefit
The most common misconception about negative gearing is that "the government pays for your investment property." This framing is misleading. The government gives you back a fraction of your loss — not the whole thing. Here is a useful way to think about it:
- For every $1 you lose on your investment property, the ATO gives you back 30 to 45 cents (depending on your marginal rate).
- You are still out 55 to 70 cents for every dollar of loss.
- The only way to come out ahead is if the property's capital growth exceeds your cumulative after-tax losses over the holding period.
The depreciation trap: Depreciation reduces your taxable income without costing you cash today, which makes the tax refund feel like "free money." But when you sell, the ATO claws back depreciation through a reduced cost base. If you claimed $60,000 in depreciation over 10 years, your cost base is reduced by $60,000, increasing your taxable capital gain by the same amount. The tax saving is deferred, not eliminated.
Consider the ten-year picture for our $600K property example. Assuming expenses stay roughly constant (in practice, rent rises but so do rates and maintenance), the cumulative after-tax holding cost over a decade is approximately $50,000–$60,000. For the strategy to break even, the property needs to have appreciated by at least that amount after paying CGT on the gain. At $600K, that is roughly 1% per year in compound growth just to break even — before accounting for the opportunity cost of your $120,000 deposit sitting in the property instead of earning returns elsewhere.
When you factor in opportunity cost (what your $120,000 deposit could have earned in a diversified portfolio at, say, 7% per year), the required growth rate to justify the investment rises to around 3–4% per year. This is achievable in strong-growth suburbs, but it is absolutely not guaranteed in every market.
When Negative Gearing Makes Sense
Negative gearing is not inherently good or bad — it is a tool whose usefulness depends on the context. It tends to work well in these situations:
1. High marginal tax rate (37% or 45%)
The higher your income, the more the government shoulders of your loss. Someone on $200,000 gets 45 cents back for every dollar of rental loss, compared to 16 cents for someone on $40,000. The strategy is objectively more efficient for high-income earners.
2. Strong-growth suburb
This is the factor that matters most. A negatively geared property in a suburb growing at 7–10% per year will generate far more wealth than the annual cash losses cost you. The tax deduction simply reduces the holding cost while you wait for capital growth to compound. In suburbs with strong demand-supply ratios (DSR above 65), low vacancy rates (below 2%), and infrastructure investment, growth rates in this range are historically common over medium-term holding periods.
3. Early in the investment lifecycle
Negative gearing is most pronounced in the first few years when interest costs are high relative to rent. As rents increase over time (typically 3–5% per year in growth suburbs), most properties transition from negatively geared to positively geared within 5–10 years, assuming interest rates don't rise dramatically. The strategy is essentially: absorb short-term losses that are partially offset by tax deductions, then enjoy positive cash flow and capital gains later.
4. When you have stable, reliable income
Negative gearing requires you to fund the gap between rent and costs from your own income. If your employment is unstable or your income fluctuates, the out-of-pocket cost becomes a risk rather than a manageable expense. You need confidence that you can sustain the holding cost for at least 7–10 years to ride through a full property cycle.
When Negative Gearing Doesn't Make Sense
The strategy actively works against you in several common scenarios that property spruikers rarely mention:
1. Low marginal tax rate
If your taxable income is under $45,000, your marginal rate is just 16%. A $10,000 rental loss saves you only $1,600 in tax, meaning your after-tax cost is $8,400 per year. That is a steep price to pay for a property that may or may not grow. At this income level, the holding cost is disproportionately painful relative to the tax benefit.
2. Flat-growth or oversupplied suburbs
Negative gearing is a losing strategy without capital growth. If you buy in a suburb with high vacancy rates (above 3%), oversupply of new dwellings, declining population, or limited economic drivers, the property may not appreciate enough to cover your cumulative losses. Outer-ring estates in cities with oversupply issues (parts of Perth, Darwin, and some SEQ corridors) have delivered near-zero growth over 5–10 year periods, turning negatively geared investors into pure loss-makers.
The numbers are stark: A negatively geared property that grows at 2% per year in a flat suburb will generate roughly $130,000 in capital growth over 10 years on a $600K purchase. After deducting cumulative after-tax holding costs ($50K–$60K), selling costs ($15K–$20K), and CGT on the gain, the investor's total return may be lower than what a term deposit would have delivered with zero risk.
3. Over-leveraged investors
If you are stretching to fund the holding costs, any shock — a rate rise, a vacancy period, an unexpected repair — can force a sale at the wrong time. Negative gearing only works if you can hold through the full cycle. Forced sales during downturns lock in losses and eliminate the entire premise of the strategy.
4. Buying for the tax deduction, not the asset
Some investors select properties specifically because they maximise tax deductions — brand-new apartments with high depreciation, for example. The problem is that high-depreciation properties (new apartments in high-supply corridors) often have the worst capital growth profiles. You end up optimising for the wrong variable: a slightly better tax refund today at the expense of significantly worse wealth creation over the long term.
Positive Gearing as an Alternative
A positively geared property is one where the rental income exceeds all costs, including interest. You earn a profit from day one. This profit is taxable, so you pay more tax than you would with a negatively geared property — but you are also not bleeding cash every month.
Positive gearing tends to be available in regional areas, mining towns, or suburbs where yields are high (6%+) relative to property prices. The trade-off is that high-yield areas often have lower capital growth potential, because prices are constrained by the local economy and population growth.
Comparing the two strategies over 10 years
Strategy A: Negatively geared in a growth suburb
$600K property, 4.5% yield, 7% annual growth. After 10 years: property worth $1.18M. Cumulative after-tax holding cost: ~$55K. Net wealth created (before CGT on sale): ~$525K.
Strong wealth creation if growth materialisesStrategy B: Positively geared in a regional town
$350K property, 7% yield, 3% annual growth. After 10 years: property worth $470K. Cumulative after-tax rental profit: ~$40K. Net wealth created (before CGT on sale): ~$160K.
Modest wealth creation, but cash-flow positive from day oneNeither strategy is universally better. Positive gearing suits investors who want cash flow now, have lower risk tolerance, or are on lower marginal tax rates (where the negative gearing tax deduction is minimal). Negative gearing suits high-income earners who can absorb the holding cost and are confident in the suburb's growth trajectory.
There is also a middle path: buying in a suburb with both reasonable yield (4–5%) and strong growth fundamentals. As rents increase over time, the property transitions from slightly negatively geared to positively geared — giving you both cash flow and capital growth. These "neutral gear" properties are often the sweet spot for investors who want to build a scalable portfolio without being dependent on tax deductions.
Policy Risk: What If Negative Gearing Gets Reformed?
Negative gearing has been a political football in Australia for decades. Labor took a policy to limit negative gearing to new properties to the 2019 election (and lost), while the Coalition has historically defended the current rules. As of mid-2026, the Albanese government has not introduced any changes to negative gearing, but the policy debate resurfaces regularly, especially when housing affordability dominates headlines.
Several reform models have been proposed over the years:
- Grandfathering: Existing negatively geared properties keep the deduction; new purchases cannot claim it. This is the most politically palatable option and was part of Labor's 2019 proposal.
- Capping the deduction: Limiting the annual deductible loss to a fixed amount (e.g., $10,000 or $20,000). This would primarily affect highly leveraged investors with large interest bills.
- Quarantining losses: Rental losses can only be offset against future rental income or capital gains from investment properties — not against salary or business income. New Zealand implemented this in 2019.
- Restricting to new builds: Only newly constructed properties qualify for negative gearing, encouraging housing supply rather than competition for existing stock.
If you are building an investment strategy that depends entirely on negative gearing to be viable, you are exposed to policy risk. Any of these reforms would reduce the tax benefit, potentially increasing your after-tax holding cost by $2,000–$5,000 per year per property.
A practical rule: If your investment only works because of the tax deduction, it probably isn't a good investment. The property should be fundamentally sound — strong growth suburb, reasonable yield, manageable holding cost — with negative gearing as a bonus that reduces costs, not the sole justification for buying.
Investors who bought in strong-growth suburbs in the early 2000s, even with negative gearing, would still have built substantial wealth if the deduction had been removed five years in. The capital growth did the heavy lifting; the tax break just made the journey slightly cheaper. Investors who bought in flat-growth areas purely for the deduction would have lost money with or without the policy change.
Key Takeaway: Growth Suburb Selection Matters More
After all the tax mechanics, cash flow tables, and policy scenarios, the conclusion is straightforward: the suburb you buy in determines 70–80% of your investment outcome. The tax treatment determines maybe 5–10%.
A property in a suburb with a high demand-supply ratio, low vacancy, population growth, infrastructure investment, and diverse local employment will outperform a "better" tax deduction in a weak suburb every single time. The difference in capital growth between a top-quartile and bottom-quartile suburb over a 10-year period is typically $200,000–$400,000 on a $600K property. The difference between being on a 30% vs 45% marginal tax rate is maybe $15,000–$20,000 in cumulative tax savings over the same period.
Put differently: spending an extra 10 hours researching suburbs will add more to your wealth than spending 10 hours optimising your depreciation schedule.
Summary: When to Use Negative Gearing
- Negative gearing reduces the after-tax cost of a rental loss — it does not eliminate it. You are always out of pocket.
- The tax benefit is proportional to your marginal tax rate: 45% earners get far more back than 16% earners.
- The strategy only works when capital growth exceeds your cumulative after-tax losses. Without growth, you are simply losing money more slowly.
- High-growth suburbs with strong demand-supply fundamentals are the prerequisite for a successful negative gearing strategy.
- Policy risk is real. Build your investment thesis around the asset's fundamentals, not the tax treatment.
- Positive gearing or "neutral gear" strategies are viable alternatives, especially for investors with lower incomes or lower risk tolerance.
Find Suburbs Where Negative Gearing Actually Works
The tax deduction only pays off if the suburb delivers growth. Use data-driven suburb analysis to find high-growth areas before committing your capital.