What is negative gearing?
When deductible expenses on an investment property exceed rental income, the loss can offset other taxable income. The mechanics, the maths, and where it actually pays off.
How it works
Negative gearing isn't a separate tax scheme — it's just the result of your investment property running at a tax loss. Rental income (gross rent) minus deductible expenses (interest, depreciation, rates, agent fees, R&M, insurance) = net rental position.
If that's negative, the loss flows through to your personal tax return. It reduces your total taxable income, lowering the tax you pay on your salary or other income.
Worked example
$500K interest-only investment loan at 6% = $30,000/year interest. Property rents for $500/wk = $26,000/year gross rent. Other expenses (rates, strata, insurance, agent) = $6,000. Depreciation on a relatively new build = $8,000. Net loss = $30K + $6K + $8K − $26K = $18,000 loss.
Investor's marginal tax rate is 39% (income $135K-$190K bracket including Medicare). $18K loss × 39% = $7,020 tax saving. So the actual cash drain after tax is $18,000 − $7,020 = roughly $10,980 — about $211/wk.
Why it only works for higher earners
The tax saving scales with your marginal rate. At the 19% bracket, an $18K loss saves $3,420 — your cash drain is $14,580/year. Negative gearing makes financial sense only when your salary is high enough (typically $100K+) AND you expect capital growth to outpace the cash losses.
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