Negative gearing is one of the most talked-about, least-understood mechanisms in Australian property investment. The term gets thrown around as if it's a magic tax dodge or a sophisticated investor trick. It's neither. It's a simple cash-flow situation with specific tax consequences — and it builds wealth only when paired with the right kind of property.
This guide walks through exactly how it works, what the numbers look like on a real Australian investment property, and the conditions under which negative gearing is a deliberately useful strategy versus when it's just slow burning.
What negative gearing actually means
An investment property is "geared" if it has a mortgage attached. The "gearing" describes the relationship between the property's holding costs and its rental income:
- Positively geared: rent > holding costs. The property generates net cash each month.
- Neutrally geared: rent ≈ holding costs. Cash-neutral.
- Negatively geared: rent < holding costs. The property loses cash each month.
"Holding costs" includes loan interest (the biggest line item by far), council rates, water rates, insurance, body corp / strata, property management fees, and ongoing repairs.
When a property is negatively geared, the cash loss can be deducted against your other income — typically your salary — under Australian tax law. That deduction reduces the tax you'd otherwise pay, recovering some of the loss as a refund at the end of the financial year.
A worked example with real numbers
Let's say Jane buys a $600,000 investment property on the Gold Coast with a 20% deposit. She borrows $480,000 at 6.5% interest. Her annual numbers might look like:
Income:
- Weekly rent: $560 × 52 weeks = $29,120/year
Holding costs:
- Interest on $480k loan: $31,200/year
- Council rates: $2,400
- Water rates: $1,200
- Building insurance: $1,500
- Landlord insurance: $400
- Property management (8% of rent): $2,330
- Repairs/maintenance reserve: $1,500
- Total: $40,530/year
Pre-tax cash position: $29,120 – $40,530 = −$11,410/year ("negatively geared")
The tax math
Jane earns $130,000/year from her main job. Her marginal tax rate at that income is 37% (plus 2% Medicare levy = 39%).
The $11,410 loss reduces her taxable income from $130,000 to $118,590. That saves her $11,410 × 39% = $4,450 in tax.
Plus, Jane can claim depreciation on the property's fixtures, fittings and (if it's a new build) construction cost. A typical depreciation schedule for a new build produces another $8,000–$12,000 of non-cash deductions in year 1, falling over time. Even if we conservatively say $7,000 of additional deduction:
- Cash loss: −$11,410
- Plus depreciation: −$7,000
- Total deduction against income: $18,410
- Tax saved: $18,410 × 39% = $7,180/year
Net after-tax cost of holding: $11,410 (cash loss) − $7,180 (tax refund) = $4,230/year, or roughly $80/week.
The wealth-building part
Negative gearing alone is just slow burning. What makes the strategy work is what happens to the property's value while you hold it.
Australian residential property has historically appreciated 5–7% per year over rolling 10-year periods, with significant variation by location. Even at a conservative 5%, Jane's $600,000 property gains:
- Year 1: +$30,000 capital growth
- Year 5: $600,000 × 1.05⁵ ≈ $766,000 (gain of $166,000)
- Year 10: $600,000 × 1.05¹⁰ ≈ $977,000 (gain of $377,000)
Over 10 years, Jane's net cost of holding was roughly $4,230 × 10 = $42,300 (ignoring rent growth and interest rate variability for simplicity). Her capital gain was $377,000. Even after factoring eventual CGT (50% discount for assets held over 12 months, then her marginal rate), her after-tax wealth created is in the order of $200,000+.
That's the negative gearing trade: small, predictable, tax-deductible cash drag in exchange for substantial capital growth over a long hold.
When it works — and when it doesn't
It works when:
- You're paying tax at a high marginal rate (32.5% or above) — the tax shield is meaningful
- The property is in a genuine growth area, not a stagnant or oversupplied market
- You can hold the property for 10+ years through interest-rate cycles
- You have the cash-flow buffer to ride out 2–3 months of vacancy or unexpected major repairs
It doesn't work when:
- Your marginal tax rate is low (the tax shield is too small to matter)
- You bought in a market where capital growth is flat or negative — you're just losing money slowly with no upside
- You overstretched on the deposit + holding-cost buffer and a single interest-rate rise forces a fire sale
- The property is a one-bedroom box in an oversupplied apartment market — high holding cost, weak rental yield, no growth
The Corbwood approach
We coordinate your investor home loan with the property selection itself, so the leverage profile and the asset profile fit together. Two principles guide every recommendation:
1. Growth area first. If the suburb doesn't have a credible 5-year growth thesis (population growth, infrastructure spend, employment hub formation, supply constraints), nothing else matters. Negative gearing without capital growth is just losing money efficiently.
2. Cash flow you can actually hold. We model your specific tax position, your income stability, and your other commitments before recommending a borrowing level. The biggest cause of forced property sales in Australia is over-leverage, not bad property choice.
The negative-gearing-vs-positive-cash-flow debate
Some property investors swear by positive-cash-flow property (rental income exceeds holding costs from day one). Others swear by negative gearing. The honest answer is: both work, in different conditions.
Positive cash flow tends to come from cheaper properties in regional/outer-metropolitan areas where rental yields are higher but capital growth is lower. Negative gearing tends to apply to higher-price properties in growth corridors where the cash drag is offset by stronger capital appreciation.
The right mix depends on your income, your risk tolerance, and your timeline. Read our positive-cash-flow guide for the other side of the comparison.
FAQ
Is negative gearing going to be abolished?
Federal Labor proposed limiting it to new builds in 2016 and 2019; both proposals were defeated. As of 2026 the rules remain unchanged, with both major parties committing to leave them alone in the current term. Long-term policy risk exists but is not imminent.
Can I negatively gear a property I bought in my SMSF?
The mechanics differ. SMSFs already pay 15% on rental income (much lower than personal rates) so the "deduction against high marginal income" doesn't apply. But within the SMSF, holding costs still reduce the fund's taxable income — and the 0% pension-phase tax rate makes the long-term tax position superior to personal-name ownership for the same property.
What's the difference between negative gearing and tax avoidance?
Negative gearing is explicit tax law — the Australian Taxation Office permits the deduction of investment expenses (including interest) against income. There's nothing aggressive or avoidant about claiming it.
How much do I need to start?
For a $500,000–$700,000 investment property at 80% LVR you need a deposit of $100,000–$140,000 plus stamp duty of $15,000–$25,000 plus a cash buffer of $10,000–$20,000. Total: $125,000–$185,000 of available cash.
Next steps
📖 Read: Positive cash flow property — the other side of the strategy
📖 Read: How we structure investor lending
📞 Talk: Book a free 30-minute call. We'll model your specific scenario honestly.
Written by
Jack Corbett
Plain-English finance from the Corbwood specialists — SMSF, property, lending, and commercial finance, all under one roof.