Negative Gearing and Positive Gearing: The Complete Australian Investor's Guide
- Negative gearing means your investment property costs more to hold than it earns in rent — and that loss reduces your taxable income.
- The tax benefit is real, but it is a side effect of a loss. It does not make the investment profitable by itself.
- In 2025-26, approximately 1.3 million Australians claim negative gearing deductions, with average losses of $6,000-$8,700 per investor per year.
- Tax savings depend entirely on your marginal rate: a $10,000 loss saves $3,200 at 32%, $3,700 at 37%, or $4,500 at 45%.
- Negative gearing is a capital growth strategy. It only builds wealth if your property appreciates enough to offset the annual holding costs.
- Positive gearing provides immediate cash flow but requires a different property selection approach — typically higher-yield, lower-growth markets.
- As of April 2026, negative gearing rules are unchanged. Political debate continues but no legislation has been introduced.
No tax strategy generates more debate in Australian property circles than negative gearing. Investors call it wealth-building leverage. Critics call it a tax loophole. The truth is more useful than either characterisation.
This guide explains exactly how negative and positive gearing work, demonstrates the real tax math with 2026 figures, and honestly addresses who benefits from each strategy — and when the strategy fails.
What Is Negative Gearing?
'Gearing' simply means using borrowed money to invest. 'Negative' gearing means your investment is running at a loss — the costs of owning the property exceed the income it generates.
Under Australian tax law, when an investment property produces a net loss, that loss can be offset against your other taxable income — most commonly your salary. This reduces your total taxable income and therefore your tax bill.
The Costs That Count
The following expenses are generally deductible for investment properties under ATO rules:
Loan interest (the interest component of mortgage repayments — not the principal)
Property management fees (typically 6-10% of rental income)
Council rates and water charges
Landlord insurance premiums
Maintenance and repairs (note: capital improvements must be depreciated, not claimed immediately)
Building depreciation (Division 43: 2.5% of construction cost annually for properties built after 1987)
Plant and equipment depreciation (Division 40: for fixtures, appliances, carpet, etc. — note: from July 2017, this only applies to assets newly installed by the current owner in existing properties)
Advertising costs for tenants
Accounting and tax preparation fees
The Negative Gearing Tax Calculation — Worked 2026 Examples
Understanding the real tax math is essential. The benefit varies enormously based on your income bracket.
| Scenario | Salary | Rental Loss | Taxable Income | Tax Rate | Tax Saved | Real Out-of-Pocket |
|---|---|---|---|---|---|---|
| Low income earner | $60,000 | $8,000 | $52,000 | 32.5% + 2% Medicare | $2,760 | $5,240/year |
| Mid income earner | $100,000 | $12,000 | $88,000 | 37% + 2% Medicare | $4,680 | $7,320/year |
| High income earner | $180,000 | $15,000 | $165,000 | 45% + 2% Medicare | $7,050 | $7,950/year |
The Core Lesson from This Table High-income earners benefit most from negative gearing because their tax rate is highest. A $15,000 annual loss saves someone on 45% tax $7,050 per year. The same loss saves someone on 32.5% tax only $2,760. This doesn't mean negative gearing is only for high earners — it means the strategy's tax efficiency varies significantly by income level. Always model your specific bracket.
Worked Property Scenario — 2026
Sarah earns $120,000 per year as a project manager. She buys a $700,000 investment property in Brisbane with a 20% deposit ($140,000), borrowing $560,000 at 6.1% interest (interest-only loan).
| Item | Annual Amount |
|---|---|
| Rental income (5.2% gross yield) | $36,400 |
| Less: Loan interest ($560,000 at 6.1%) | -$34,160 |
| Less: Property management (8%) | -$2,912 |
| Less: Council rates and insurance | -$3,600 |
| Less: Maintenance allowance | -$2,500 |
| Less: Depreciation (building + fixtures) | -$8,000 |
| Net rental loss | -$14,772 |
Sarah's $14,772 loss reduces her taxable income from $120,000 to $105,228. At a marginal rate of 37% (plus 2% Medicare levy), her tax saving is approximately $5,800 per year.
Her real out-of-pocket annual cost: $14,772 loss minus $5,800 tax saving = $8,972 per year, or approximately $172 per week.
For Sarah's strategy to succeed, she needs Brisbane property to appreciate enough over her holding period to offset $8,972 per year in holding costs — and deliver a meaningful capital gain on exit.
The Capital Gains Tax Discount: Why It Matters
Negative gearing's value compounds with Australia's 50% CGT discount. When an individual sells an investment property held for more than 12 months, only 50% of the capital gain is included in their taxable income.
CGT Discount Worked Example Sarah holds her Brisbane property for 10 years and sells it for $1,050,000 — a $350,000 capital gain. Under the 50% CGT discount, only $175,000 is added to her taxable income in the year of sale. At her 45% marginal rate (having worked her way up over 10 years), her CGT bill is approximately $78,750 — not $157,500 she would have paid without the discount. Over the decade, she spent $89,720 in holding costs but generated a $350,000 capital gain. Net position: +$260,280 before tax, +$181,530 after CGT. The strategy worked because Brisbane delivered strong capital growth.
Is Negative Gearing Still Viable in 2026?
Some commentators argue that higher interest rates have killed negative gearing as a viable strategy. The reality is more nuanced.
Higher interest rates mean larger loan interest deductions — making the tax benefit bigger. However, they also mean larger annual cash shortfalls that the investor must fund from salary. For investors who can manage the cash flow, high-rate environments actually increase the deductible loss.
The strategy's viability in 2026 depends primarily on:
Can you afford the annual cash shortfall? At $560,000 borrowed at 6.1%, interest-only, your annual interest bill is $34,160. With $36,400 in rent and other costs, you need salary income to cover approximately $8,000-$15,000 per year after tax savings. This requires financial stability.
Is the market growing? Negative gearing without capital growth is simply losing money slowly. The strategy only makes sense in markets where long-term appreciation is credible.
What's your time horizon? Negative gearing requires patience — typically 7-15 years for the capital growth to offset the accumulated holding costs.
As of April 2026, negative gearing rules remain unchanged. No legislation has been introduced to limit or remove the tax benefit, though the topic continues to be debated politically.
What Is Positive Gearing?
Positive gearing is the opposite situation — your rental income exceeds all expenses, generating a profit. This profit is assessable income and taxed at your marginal rate.
Positively geared properties are most commonly found in regional areas, smaller capitals, or in older properties with low outstanding debt. As property values have increased significantly over recent years, finding positively geared properties in major capital cities has become increasingly difficult.
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | Monthly shortfall — you contribute from salary | Monthly surplus — property pays itself and more |
| Tax in holding period | Reduces your taxable income each year | Adds to your taxable income each year |
| Primary goal | Capital growth over long term | Immediate income and cash flow |
| Risk if rates rise | Shortfall increases — more strain on salary | Property may still cash-flow positive |
| Best for | High-income earners, long time horizon | Income-focused, retirees, conservative investors |
Neutral Gearing: The Third Option
Neutral gearing is when rental income exactly covers all expenses — neither a loss nor a profit. The property holds itself while (hopefully) appreciating. Many investors start negatively geared and gradually move toward neutral or positive as rents increase over time relative to their fixed (or falling) loan balance.
The ATO's Apportionment Rules — Common Traps
The ATO has specific rules about mixed-use properties and loan purposes that investors must understand:
Interest on funds redrawn from an investment loan for private purposes (a holiday, a car, personal expenses) is not deductible. Only the interest on the original investment purpose is claimable.
If you rent your property at below-market rates (e.g., to a family member), the ATO may disallow a portion of your deductions.
Holiday rental properties require careful apportionment — you can only claim deductions for periods the property is genuinely available to paying tenants at market rates.
Capital improvements (a new kitchen, bathroom renovation, additional room) must be depreciated over time, not claimed as immediate repairs.
Depreciation: Negative Gearing's Underused Advantage
One of the most powerful — and most underutilised — elements of negative gearing is depreciation. Unlike most deductions, depreciation is a non-cash deduction: you claim it without physically spending the money in that year.
A professional depreciation schedule from a registered quantity surveyor typically costs $400-$800 and can identify $5,000-$15,000 in annual depreciation deductions for properties built after 1987. At a 37% tax rate, that's $1,850-$5,550 in additional annual tax savings — paid for once, claimed for decades.
Note: Investors who purchase existing (second-hand) residential properties after 9 May 2017 can no longer claim depreciation on pre-existing plant and equipment (carpet, blinds, ovens, etc.) that were installed by a previous owner. Capital works deductions (the building structure at 2.5% per year) are still claimable regardless of when the property was built or when you purchased it.
Frequently Asked Questions
Can I negatively gear a property in a company or trust name?
No — the 50% CGT discount and the ability to offset rental losses against personal salary income only applies to individual taxpayers. Companies are taxed at the corporate rate (25-30%) with no CGT discount. Trusts can pass income and losses to beneficiaries, but the structure is more complex. Speak to a solicitor and accountant before structuring property in a trust or company.
How many properties can I negatively gear?
There is currently no limit on the number of properties you can negatively gear. However, each additional investment property reduces your borrowing capacity, and each adds to the cash flow you need to fund from salary. As of April 2026, proposed caps on negative gearing (to 2 properties) have not been legislated.
What happens to negative gearing if interest rates fall?
If interest rates fall significantly, your loan interest expense decreases — which could reduce or eliminate the rental loss. A property that was negatively geared at 6.5% interest may become neutrally or positively geared at 5.0%. Your net financial position typically improves, even though the 'tax benefit' shrinks.
Disclaimer: This article provides general educational information about gearing strategies for investment property in Australia. It does not constitute financial, tax, or accounting advice. Tax law is complex and your specific circumstances will determine the outcome of any strategy. Consult a registered tax agent or qualified accountant before making any investment decisions.
Written by Luke Drake | Authorised Credit Representative (CRN: 565112) | Frontier Finance Co