Negative gearing is one of the most widely cited — and widely misunderstood — concepts in Australian property investment. Here is a clear, honest explanation of what it actually means, how the tax benefit works in practice, and when it is and is not a good strategy for property investors.
What Is Negative Gearing?
A property is negatively geared when the rental income it generates is less than the costs of owning it — including loan interest, property management fees, council rates, insurance, maintenance and depreciation. The resulting shortfall (the loss) can be deducted from your taxable income, reducing the tax you pay to the ATO.
How Does Negative Gearing Work in Practice?
| Item | Annual Amount |
|---|---|
| Rental income | $28,000 |
| Loan interest | $36,000 |
| Property management (8%) | $2,240 |
| Council rates, insurance, maintenance | $3,500 |
| Depreciation (building and fittings) | $4,000 |
| Total deductible costs | $45,740 |
| Net rental loss (negative gearing amount) | $17,740 |
| Tax saving at 37% marginal rate | $6,564 |
| Real after-tax annual shortfall | $11,176 |
This means you are still out of pocket by over $11,000 per year. The tax saving is real, but it does not make a bad investment good.
When Does Negative Gearing Make Sense?
Negative gearing makes financial sense when:
- You are in a high marginal tax bracket (37% or 45%) so the tax offset is significant
- The property has strong capital growth prospects that will outweigh the annual shortfall over time
- The shortfall is manageable relative to your income and cash flow
- You have a long investment horizon (7 to 10 years minimum)
When Does Negative Gearing Not Make Sense?
- When you are on a low marginal tax rate — the tax saving is minimal
- When the property has poor capital growth prospects — you lose money without a compensating gain
- When the cash flow shortfall puts financial strain on your household budget
- When interest rates rise significantly, increasing the annual shortfall
Negative Gearing vs Positive Gearing
| Strategy | Cash Flow | Tax Position | Best When |
|---|---|---|---|
| Negative gearing | Annual shortfall | Loss offsets income tax | High income, high growth market |
| Positive gearing | Annual surplus | Profit added to taxable income | Lower income, high yield market |
| Neutral gearing | Break even | No tax impact | Balanced yield and growth |
Frequently Asked Questions
Is negative gearing only available in Australia?
Australia is one of the few countries that allows losses on investment properties to be offset against unrelated income. It is a feature of the Australian tax system that is periodically debated in political circles.
Can I negative gear any property?
Yes, any residential or commercial investment property that generates a rental loss can be negatively geared. The loss offsets your other income in the same tax year.
Should I buy a negatively geared property?
Only if the capital growth prospects justify the annual shortfall and the shortfall is manageable for your financial situation. A Collings Property Advisor can provide independent investment analysis to help you make this decision.
Get Independent Investment Property Advice
Collings Property Advisory provides independent investment analysis for buyers considering negatively geared properties in Melbourne and across Australia. Fixed fee: $4,500 + GST. Contact us at collings.com.au.
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