What is Negative Gearing?

What it is

Negative gearing is a tax and finance term, not a product. It describes the position that arises when an investor borrows money to buy an income-producing asset, such as a rental property or shares, and the deductible costs of owning that asset (interest, rates, body corporate fees, repairs, depreciation, agent fees and similar items) exceed the income it produces. The ATO and the Australian Securities and Investments Commission have long described negative gearing in those terms. In Australian property, negative gearing is closely associated with residential investment because of the size of mortgages, the deductibility of interest used to acquire a rental property, the rental property rules and the way the resulting tax loss may be applied against other assessable income.

Why it matters

Negative gearing matters because it changes how investors think about cash flow, risk, growth and tax. Investors who plan to claim a loss against other income need to understand exactly which costs the ATO accepts as deductible, how rental income is measured, the timing of capital allowances, the difference between repairs and improvements, and how losses interact with capital gains tax. Lenders also pay attention. They consider rental income, ongoing costs, the borrower’s wider cashflow and the risk of rate rises, vacancies or interest-rate-driven shortfalls. Households with negatively geared property need to know they can fund the cash shortfall during the holding period, not just rely on a future tax refund.

How it works

An investor buys a rental property, usually with a loan. Each year, the rental income is reported and deductible expenses are claimed under the rental property rules. Common deductions include interest on a loan used to acquire the property, council rates, water charges, body corporate or owners corporation fees, insurance, agent management fees, repairs and certain capital allowances. When the deductible costs exceed the rental income, the resulting net rental loss can be offset against other assessable income, such as wages, salary or business income, in line with the rental property rules and the investor’s circumstances. Strategy therefore depends on the gap between rent and costs, the marginal tax rate, expected vacancies and the long-run growth assumption that underpins the position. The ASIC consumer guidance warns that negative gearing relies on capital growth or sustainable rents to make economic sense, because the investor is choosing to fund a holding loss in the short term in pursuit of a longer-term return.

In practice

In practice, an investor uses negative gearing as part of a broader plan that considers serviceability, interest rates, vacancy risk, maintenance, depreciation, capital gains tax discounts when held for more than 12 months, body corporate obligations and exit timing. The strategy is often considered alongside other tactics, such as positive gearing, lower-leverage investing or paying down owner-occupied debt. The right answer depends on personal circumstances, marginal tax rates, lender requirements and the property's expected rental and capital trajectory.

In practice, investors should not treat tax savings as the entire return. The ATO’s “Income from rental properties” guidance focuses on what is deductible and how losses are handled, not on whether negative gearing is the right strategy for any individual. ASIC’s investor education emphasises that gearing amplifies both gains and losses and depends on capital growth assumptions. Buyers should model interest-rate stress, vacancy stress and unexpected repair costs before committing to a negatively geared position, and they should verify deductibility with a registered tax practitioner using current legislation.

Common misconceptions

1. Negative gearing is automatically a tax-saving strategy. It only reduces tax to the extent the loss is allowable and the investor has other taxable income. The economics still depend on capital growth and sustainable rent.
2. Negative gearing applies only to property. It can apply to any income-producing investment funded by borrowing, including listed shares, although property is the most common context in Australia.
3. If the property runs at a loss, all costs are deductible. Deductibility is governed by the rental property rules. Some costs are deductible immediately, some are capital, and some are not deductible at all.
4. The tax refund covers the holding cost. A tax refund only returns a portion of the loss based on the investor’s marginal rate. The investor still funds the cash shortfall from their own resources during the holding period.

Related terms

• Property Manager — the licensed agent who handles a rental property, whose fees may form part of deductible costs.
• Body Corporate — the owners corporation whose levies appear in many deductible-cost lists for strata investors.
• Positive Gearing — the opposite scenario, where rental income exceeds deductible holding costs and the investment produces taxable surplus income.
• Capital Gains Tax (CGT) — the tax on net capital gains made when the property is sold, which interacts with a negatively geared strategy.
• Depreciation Schedule — a quantity surveyor’s report supporting capital allowance deductions on a rental property.
• Lenders Mortgage Insurance (LMI) — an insurance cost that lenders may require where loan-to-value ratios are high.
• Loan-to-Value Ratio (LVR) — the ratio of borrowed funds to property value that drives lender risk assessment for geared investors.