Over 2 million Australians use negative gearing. Is it worth it? This guide shows exactly how it works, with real numbers at every tax bracket.
Negative gearing is simple: your investment property costs more to hold than it earns in rent. The "loss" reduces your taxable income from your salary.
Example: $600K Investment Property
Rental income: $26,000/year ($500/week)
Expenses: mortgage interest ($31,200 at 5.2% on $600K), rates ($2,500), insurance ($1,800), management ($2,080), maintenance ($2,000), depreciation ($5,000)
Total expenses: $44,580
Annual loss: -$18,580 → deducted from your salary income
The higher your marginal tax rate, the more valuable the tax deduction.
| Taxable Income | Marginal Rate | Tax Saved on $18.5K Loss | True Cost |
|---|---|---|---|
| $18,201 – $45,000 | 19% | $3,530 | $15,050 |
| $45,001 – $120,000 | 32.5% | $6,039 | $12,541 |
| $120,001 – $180,000 | 37% | $6,875 | $11,705 |
| $180,001+ | 45% | $8,361 | $10,219 |
Includes Medicare levy (2%). True cost = Annual loss minus tax saving. Higher bracket = lower true cost.
You can claim these costs against your rental income:
Mortgage Interest
On the investment loan only — not principal repayments
Depreciation (Building)
2.5% per year for buildings constructed after September 1987
Depreciation (Fittings)
Carpet, blinds, appliances, hot water — diminishing value method
Council & Water Rates
Annual council and water rates for the property
Property Management
6-8% of rent if using a property manager
Landlord Insurance
Covers tenant damage, loss of rent, liability
Repairs & Maintenance
Fixing existing items (not improvements — those are capital costs)
Accounting Fees
Cost of preparing rental income tax return
Negative gearing only makes sense if capital growth exceeds your after-tax holding cost. Here's what that looks like:
5-Year Scenario: $600K Property at 5% Annual Growth
Value at year 5: $765,769 → Capital gain: $165,769
After 50% CGT discount (37% bracket): CGT payable ~$30,667
Total holding costs over 5 years (after tax savings): ~$58,525
Net profit after CGT and holding costs: ~$76,577
Effective annual return on your cash outlay: ~26%/year (leveraged)
The risk: if capital growth is 0-2%, negative gearing becomes a genuine loss. You're paying real money to hold an asset that isn't appreciating. Location selection is critical.
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | Negative (you pay each week) | Positive (rent exceeds costs) |
| Tax effect | Reduces taxable income | Increases taxable income |
| Capital growth focus | High — relies on appreciation | Lower — income-focused |
| Risk | Higher — needs growth to profit | Lower — cash flow positive |
| Best for | High-income earners, growth areas | Any bracket, regional/high-yield areas |
Our negative gearing calculator shows your exact tax saving, true out-of-pocket cost, and capital growth projection — personalised to your salary and property.
Negative gearing means owning an investment property where the costs (mortgage interest, maintenance, depreciation, insurance, council rates) exceed the rental income. The resulting 'loss' is deducted from your other taxable income (salary, wages), reducing your overall tax bill. It's a tax strategy used by over 2 million Australian property investors.
It depends on your marginal tax rate and capital growth expectations. At the 37% marginal rate ($120K salary), a $10,000 annual property loss saves $3,700 in tax — meaning your true out-of-pocket cost is $6,300. If the property appreciates by 5%+ per year, the capital gain (taxed at a 50% CGT discount) may far exceed your annual out-of-pocket cost.
Deductible expenses include: mortgage interest (not principal), council rates, water rates, strata fees, property management fees (6-8% of rent), insurance, repairs and maintenance, depreciation on building (2.5%/yr for post-1987) and fittings (diminishing value method), travel to inspect (limited), accounting fees.
If you hold an investment property for 12+ months before selling, you only pay capital gains tax on 50% of the gain. Example: buy at $500K, sell at $700K after 5 years. Gain = $200K. Taxable gain = $100K (50% discount). At 37% marginal rate, CGT = $37,000 — an effective rate of 18.5% on the full gain.