What is negative gearing in Australia and when does it make sense?

Negative gearing Australia is used by approximately 1.1 million property investors - just under half of all landlords - yet many of them couldn't tell you exactly how much tax they're saving or whether the strategy is actually building their wealth (Source: ATO Taxation Statistics 2022-23, analysed by RMIT researcher Liam Davies, December 2025). The gap between knowing the term and understanding the maths costs investors real money.

A property that generates an annual cash loss isn't automatically a bad investment, but it isn't automatically a good one either. This post walks through the mechanics of negative gearing with a worked example, shows you the real tax savings at each income bracket for FY2025-26, explains when the strategy makes financial sense and when it doesn't, and covers depreciation - the non-cash deduction that can significantly reduce your out-of-pocket holding costs.

How negative gearing works in Australia

Negative gearing occurs when the costs of owning an investment property exceed the rental income it produces. Under Section 8-1 of the Income Tax Assessment Act 1997, you can offset that net rental loss against your other income - most commonly your salary - reducing your total taxable income and therefore your tax bill.

This is the key distinction from many other countries. In the UK, rental losses can only be offset against future rental profits. In the US, loss deductions are capped based on income and participation rules. Australia permits an unlimited offset against salary income, which is why the strategy has become so embedded in residential property investment here.

The ATO's definition is straightforward: a property is negatively geared if it's purchased with borrowed funds and the net rental income, after all deductible expenses, is less than the interest on those borrowings. The resulting loss is declared in your tax return and reduces your assessable income for that year.

TOOL: Negative Gearing Calculator

Enter your property's income, expenses, and interest costs to see your annual tax saving at your marginal rate.

A worked example: the real numbers behind a $600,000 investment property

Here's a realistic scenario based on current market conditions, with the RBA cash rate at 4.10% as of March 2026.

You purchase a $600,000 investment property. It rents for $400 per week, producing $20,800 in annual rental income. Your annual mortgage interest is equivalent to $450 per week ($23,400 per year on a roughly $520,000 loan at 6.25% interest rate - note that principal repayments are not deductible, only the interest component). You also pay $5,000 in rates, property management fees, landlord insurance, and minor repairs.

Total deductible expenses: $23,400 + $5,000 = $28,400. Rental income: $20,800. Net rental loss: $7,600.

That $7,600 loss reduces your taxable income by $7,600. The tax saving depends on your marginal rate:

Taxable income (FY2025-26)

Marginal rate (incl. Medicare Levy)

Tax saving on $7,600 loss

$18,201 - $45,000

19%

$1,444

$45,001 - $135,000

32.5%

$2,470

$135,001 - $190,000

39%

$2,964

Over $190,000

47%

$3,572

Source: ATO tax rates FY2025-26, including 2% Medicare Levy

If you're earning between $135,001 and $190,000 (the 37% marginal tax rate bracket, which becomes 39% including Medicare Levy), you save $2,964 on a $7,600 loss. At the top bracket above $190,000 (47% including Medicare Levy), you save $3,572. Those savings reduce your out-of-pocket cash flow cost but don't eliminate it.

This is the most important point: you are still making a net cash loss. The tax benefit reduces the cost of holding the property, it doesn't turn it into a profit. The strategy only builds wealth if the property's capital growth exceeds the accumulated annual shortfall over your holding period. Run your full figures through the Cash Flow Calculator to see your true holding cost week by week, after tax.

TOOL: Cash Flow Calculator

Model your after-tax weekly cash flow including interest, depreciation, and management costs to see your true holding position.

Depreciation: the non-cash deduction most investors underuse

Depreciation is where the numbers can shift materially in your favour. It's a non-cash deduction - you claim it on your tax return without spending any additional money. The ATO allows claims under two divisions of the Income Tax Assessment Act 1997.

Division 43 (capital works) covers the building structure itself: walls, floors, roof, and fixed components. Residential properties built after 15 September 1987 are depreciated at 2.5% per year on the original construction cost, over 40 years. On a building component valued at $280,000, that's $7,000 in additional deductions every year.

Division 40 (plant and equipment) covers removable assets: carpets, air conditioning units, hot water systems, blinds, and appliances. Each item is depreciated over its ATO-assessed effective life. However, an important rule change from 9 May 2017 applies here: if you purchase a second-hand established property, you can only claim Division 40 on new items you install yourself, not on existing assets. Division 43 (the building structure) remains available regardless of when you purchased the property.

A qualified quantity surveyor is the ATO-recognised professional to prepare your depreciation schedule. A typical schedule costs between $400 and $700 - the fee is itself tax-deductible - and commonly identifies $5,000 to $15,000 in additional annual deductions, depending on the property's age and type (Source: property depreciation industry data, 2025). For any post-1985 property you should commission one before lodging your first tax return.

Adding depreciation to the worked example above could push total deductions from $28,400 to $34,000 or more on a property with a modest depreciation schedule. Check the Rental Yield Calculator to see how your gross and net yield change once you factor in these deductions.

When negative gearing makes strategic sense

Negative gearing is not a universally good strategy. It makes clear financial sense only when a specific combination of factors is present.

The strategy works best for investors on higher marginal tax rates (37% or 45% bracket), because the tax saving is worth more. A $10,000 loss saves $4,700 at the 47% rate (including Medicare Levy) versus $3,250 at the 32.5% rate. If you're earning under $45,000, the tax benefit is modest and may not justify the cash flow pressure.

It also requires a property in a market with strong, consistent capital growth. The annual cash shortfall compounds over time. If you're $7,600 out of pocket each year and hold for 10 years, you've absorbed roughly $76,000 in real losses before tax savings. The property's capital growth needs to comfortably exceed that figure to produce a positive overall return.

A long intended hold period is essential. The 50% capital gains tax (CGT) discount only applies to assets held for more than 12 months, and the real power of negative gearing compounds over 7 to 15 years as inflation erodes the real value of your debt and rental income gradually rises toward and then above your costs.

Watch Out For: Relying on the annual tax saving to make a poor-growth property viable. A $3,000 annual tax refund doesn't fix a property that grows at 2% per year in a market where the average is 6%. The tax benefit is a holding cost reducer, not a performance substitute. According to ATO Taxation Statistics 2022-23, negatively geared investors collectively claimed over $10.9 billion in losses in the 2023-24 financial year - but that loss needs capital growth on the other side to produce a real return. Always model the total return, not just the tax saving.

When negative gearing doesn't make sense

The strategy breaks down in several common scenarios investors overlook.

Weak or speculative capital growth markets remove the foundation of the strategy. If the property isn't growing in value at a rate that exceeds the annual cash shortfall, you're simply accumulating real losses. Oversupplied apartment markets and some regional towns with declining population fall into this category.

High vacancy rates compound the problem. If your property sits vacant for six to eight weeks per year, the rental income you've modelled doesn't materialise, but the interest and costs still do. Run a scenario with four weeks' vacancy in the Cash Flow Calculator before committing to any purchase price.

Low-income investors face a double disadvantage: a smaller tax saving from the loss and a tighter cash flow buffer to absorb the shortfall. If holding the property requires you to draw on an emergency fund or use a credit card to cover shortfalls, the strategy carries financial risk that can outweigh the long-term benefit.

The misconception that 'you're losing money to save on tax' deserves direct treatment. You don't benefit by losing more money. A $10,000 loss at the 37% marginal rate saves $3,700 in tax, but you still net $6,300 worse off in cash terms than if you'd had no loss at all. The bet you're making is that capital growth will more than compensate for this over time. If that growth doesn't eventuate, the tax saving is cold comfort.

TOOL: Negative Gearing Calculator

Model your specific property's annual tax saving across different income scenarios and holding periods to check whether the numbers stack up.

The policy debate: is negative gearing safe?

As of April 2026, negative gearing remains fully intact under Australian tax law. Labor ruled out changes ahead of the 2025 election and has repeatedly affirmed the policy since taking office. The government was modelling targeted reforms ahead of the May 2026 budget, but no legislation has been introduced as of the date of this post.

Historically, Australia briefly quarantined negative gearing between 1985 and 1987 under the Hawke government. The policy was reinstated after two years, with the stated reason being pressure on rental markets in Perth and Sydney, which then had the lowest vacancy rates among capital cities.

The Parliamentary Budget Office estimated in 2024 that negative gearing and the CGT discount would cost the federal budget over $100 billion across the following decade. That scale of fiscal cost keeps the policy in ongoing political debate, and any investor with a long hold horizon should model their return under a scenario where future tax treatment changes - though established properties have historically been grandfathered in any proposed reform.

The Bottom Line: Negative gearing reduces the cost of holding an investment property - it doesn't guarantee a positive return. The strategy makes the strongest sense for investors in the 37% or 45% tax bracket, holding a property in a high-growth market over a 7 to 15-year horizon. Always model the total return including capital growth, not just the annual tax saving. Use a quantity surveyor to maximise depreciation claims, and confirm your actual cash flow position before purchasing.

Start with your numbers before you commit to any property: use the Negative Gearing Calculator to model your tax saving, then run your full holding costs through the Cash Flow Calculator to check your real after-tax position week by week. This article is for informational purposes only and does not constitute financial advice.