Note, this is a guide containing general information only. Please seek personalised professional advice from a qualified advisor before making significant financial decisions.
What is negative gearing?
Negative gearing is when your investment property costs (e.g. your home loan interest, maintenance costs) exceed your rental returns. This means you've made a loss on your rental property which you can claim as a tax deduction against other income (e.g. your salary, other rental properties).
This makes negative gearing a popular investment strategy in Australia, especially for borrowers in higher tax brackets.
The opposite of negative gearing is positive gearing, which occurs when rental returns exceed home loan repayments and other property costs. Neutral gearing is when an investment property’s income and expenses are roughly equal.
‘Gearing’ simply means borrowing money to buy an asset. It’s commonly associated with investment properties but can also apply to other types of investments, such as shares.
Australia’s tax system operates on the principle that people pay tax on their personal income, minus any expenses (called deductions) incurred in generating that income. This is similar to the work-related tax deductions PAYG employees can claim on items like office supplies, uniforms, travel expenses, etc.
How does negative gearing work?
Here’s an example of how negative gearing works.
- Suppose you have an annual salary/taxable income of $80,000
- You own an investment property generating $20,000 in rental income each year
- Your property expenses, including mortgage interest, council rates, insurance premiums, and other costs, total $25,000 (this results in a taxable loss of $5,000)
- Using negative gearing, you could deduct this $5,000 loss from your annual taxable income of $80,000, reducing it to $75,000.
If you project that your investment property will be negatively geared (i.e. incur a loss) over the financial year, you can request a PAYG Withholding Variation from the Australian Taxation Office (ATO) to reduce the amount of tax deducted from your salary. This can help improve your cash flow during the year.
In the context of negative gearing, only the interest component of the loan is typically considered when calculating a loss, not the full repayment amount. This is because the interest portion is tax-deductible, while the principal repayment is not. That’s one reason why some property investors favour interest-only loans as 100% of the loan repayments may be tax deductible.
Before making any property investment decisions, it’s best to speak to a mortgage broker and/or tax adviser about your options.
Does negative gearing impact your borrowing capacity?
Mansour Soltani , Money's home loan expert
“Negative gearing generally won’t greatly impact your borrowing capacity. In fact, most investment properties start as negatively geared, so lenders assess your borrowing capacity by factoring in your overall taxable income and expected rental returns and assume an amount for negative gearing. Investors need to consider how they’ll service their loan, how much rent they can expect, and how they’ll manage the shortfall between the two.”
Mansour Soltani , Money's home loan expert
Negative gearing tax benefits
Negative gearing allows you to claim a net rental loss against other taxable income, such as your salary, business income, or rental income from other properties. If your other income is not enough to offset the loss from your rental property, you can carry forward your loss to the following income year, according to the ATO.
How to calculate negative gearing tax savings
Example negative gearing tax savings calculation
According to H&R Block, to calculate your negative gearing tax savings, you’ll need to add up all your eligible property expenses incurred in a tax year and subtract any rental income earned. Assuming you’ll incur a loss, subtract the resulting amount from your taxable income to determine your tax owing based on your marginal tax rate.
Example negative gearing calculation:
- Original annual taxable income: $80,000 (estimated tax $16,467)
- Rental income: $20,000
- Eligible expenses (e.g. mortgage interest, maintenance, property management fees, insurance, etc.): $25,000
- Net rental loss: $5,000
Adjusted annual taxable income: $80,000 − $5,000 = $75,000 (estimated tax $14,842)
Negative gearing tax savings: To determine the exact tax savings, you would apply the marginal tax rate to the reduction in taxable income. You’re assuming a marginal tax rate of 32.5% (for income between $45,001 and $120,000 in Australia for the 2023-2024 tax year).
Tax savings: $5,000 × 0.325 = $1,625 (or $16,467 - $14,842)
How to claim negative gearing on your tax return
According to Mark Chapman, Director of Tax Communication at H&R Block: “In the rental property section of your tax return, you simply record both the income and the expenses attached to the property. The loss is then offset against your other income. Any surplus loss (i.e. any loss which could not be offset against other income) is carried forward and is available to use in a future income year.”
Pros & cons of negative gearing
Pros
- Negative gearing reduces your income tax liability by the equivalent of your rental loss (i.e. if your rental rental loss is $5,000, it reduces your taxable income by that amount).
- Negative gearing gives you the flexibility to pursue properties with growth potential, even if they initially incur losses, as opposed to restricting you to areas where rental income covers all expenses.
- Negative gearing may encourage investors to keep rents lower than they otherwise might be to offset rental losses against other income.
Cons
- Negative gearing can impact your cash flow, so you’ll need to ensure you have enough income from other sources to cover your loan repayments and other pre-tax costs.
- It may take longer to recoup borrowing and property transaction costs (e.g. stamp duty, mortgage registration fees) when you’re negatively geared.
- Reliance on future capital growth to offset current losses can be risky as it’s never guaranteed.
Does negative gearing favour high-income earners?
Mark Chapman, Director of Tax Communication at H&R Block
“Yes, because the loss that you make on your annual rental losses is relieved at your marginal (top) rate of tax. If you are a 45% taxpayer, you receive far more benefit than someone who is only a 19% taxpayer (or indeed someone who doesn’t pay tax at all, in which case there is no benefit!). In other words, negative gearing works best at the top tax rates because those rates give the biggest tax breaks. At the lower tax rates, the benefits shrink proportionately.”
Mark Chapman, Director of Tax Communication at H&R Block
Let's say someone earns $180,000 annually (estimated tax $51,667) and incurs a rental loss of $5,000. Using the marginal tax rate of 45% (for income over $180,001 in Australia for the 2023-2024 tax year):
- Adjusted annual taxable income: $180,000 − $5,000 = $175,000 (estimated tax $49,817)
- This reduces your income to a lower tax bracket (at 37%)
- Negative gearing tax savings: $5,000 × 0.37 = $1,850 (or $51,667 - $49,817)
So, with a $5,000 rental loss, this results in a tax saving of $1,850 for someone earning over $180,000, compared to a tax saving of $1,625 for someone on an annual income of $80,000 incurring the same rental loss.
Is negative gearing worth it?
Negative gearing can be an effective strategy for investors looking to reduce their tax liability while capitalising on potential long-term capital growth (if they hold onto the property for long enough). However, it’s only suitable for investors with sufficient cash flow during the negative gearing period to meet their loan repayments and cover other property expenses until they can claim their deductions at tax time each year, according to Mark Chapman.
According to the latest Tax Expenditures and Insights Statement, among the 2.4 million property investors who claimed rental deductions in 2020–21, almost 1.1 million (45%) negatively geared their properties and declared a net rental loss.
The suitability of negative gearing also depends on your life stage
Mansour Soltani , Money's home loan expert
"As a general rule, you want to incur losses and claim tax deductions when you're paying high taxes, such as at the peak of your career. Later in life, when your tax rate is lower, such as around retirement, you’d want to have positively geared properties or to have paid off your debts."
Mansour Soltani , Money's home loan expert
Negative gearing doesn’t come without risks
Uncertain income
Initially, you won't generate a passive income from the investment property, and there's no guarantee when you will start earning one.
Capital gains dependence
A negative gearing strategy may also increase your reliance on capital gains, which are never guaranteed (especially in slow growth periods). That is unless you attempt to manufacture capital gains yourself with renovations or improvements (potentially costing you more money).
It’s best to chat to a mortgage broker and/or tax adviser about your options before making any property investment decisions.
