What negative gearing actually means
An investment property is negatively geared when your total expenses exceed your rental income. The rental loss can then be deducted against your other income — typically your salary — which reduces your taxable income and generates a tax refund.
This is not a special concession or loophole. It's simply the application of ordinary tax law: legitimate business losses are deductible against assessable income. Rental properties happen to be common in Australia, so negative gearing has become synonymous with property investing — but the same principle applies to shares bought with borrowed money, managed funds, and any other income-producing investment.
Key principle: Negative gearing means you're losing money on a cash flow basis. The tax deduction reduces your loss — it doesn't eliminate it. You're still out of pocket every year. The strategy only makes sense if you expect capital growth to exceed those cumulative losses.
The real maths: a worked example
Let's say you own an investment property in Perth. The numbers look like this:
Annual property income and expenses
This $23,938 loss is your negative gearing deduction. It gets added to your tax return and reduces your taxable income by that amount.
Tax saving from negative gearing (salary $140,000)
The tax refund of $8,857 sounds good. But you're still losing $15,081 per year in real cash — money that leaves your account every single year you hold this property. Over 10 years, that's $150,810 in cumulative out-of-pocket costs (ignoring inflation and rate changes).
The critical question: Will the property's capital growth exceed $150,810 plus the opportunity cost of your deposit? If the property grows from $800,000 to $1,100,000 over that decade, the $300,000 gain (subject to 50% CGT discount) likely justifies the annual losses. If growth is modest, you've simply subsidised a bad investment with a tax refund.
What can and can't be deducted
Not all property expenses are deductible — and confusing deductible expenses with capital costs is one of the most common errors Australian investors make.
| Expense | Deductible? | Notes |
|---|---|---|
| Mortgage interest | ✅ Yes | Only the interest portion, not principal repayments |
| Property management fees | ✅ Yes | Including letting fees and advertising |
| Council and water rates | ✅ Yes | While the property is rented or available for rent |
| Insurance | ✅ Yes | Building, landlord, and contents insurance |
| Repairs and maintenance | ✅ Yes | Must be genuine repairs, not improvements |
| Depreciation | ✅ Yes | Building allowance (2.5%) and plant & equipment |
| Stamp duty | ❌ No | Added to cost base for CGT purposes instead |
| Renovations / capital improvements | ❌ No | Added to cost base, claimed via depreciation |
| Principal repayments | ❌ No | Never deductible — only interest is |
| Personal use periods | ❌ No | Expenses during personal use are not deductible |
The repairs vs improvements trap
The ATO draws a clear line between repairs (deductible) and improvements (capital, not immediately deductible). Fixing a broken tap is a repair. Replacing all the tapware throughout the property is an improvement. Repairing a section of damaged fence is a repair. Replacing the entire fence is an improvement.
Capital improvements are added to the property's cost base for CGT purposes, which reduces your capital gain when you eventually sell. They're not lost — but they don't give you an immediate tax deduction.
Depreciation: the non-cash deduction
Depreciation is the most valuable — and most overlooked — component of negative gearing. Unlike your other expenses, depreciation doesn't cost you cash in the year you claim it. It's a paper deduction representing the declining value of the building structure and its fixtures and fittings.
There are two categories:
- Division 43 (building allowance): 2.5% of the original construction cost per year for residential properties built after September 1987. On a property that cost $350,000 to build, that's $8,750 per year.
- Division 40 (plant and equipment): Items like carpet, dishwashers, hot water systems, blinds, and air conditioning — each depreciating at different rates. Since 2017 legislation changes, second-hand properties purchased after May 2017 cannot claim plant and equipment depreciation on existing items.
Tip: A quantity surveyor's depreciation schedule costs $500–$800 and typically identifies $5,000–$15,000 in annual deductions for a new property. It's almost always worth the cost. Make sure your schedule covers both Div 43 and Div 40 items.
Negative gearing on shares
The same rules apply to shares bought with borrowed money. If you take out a margin loan or use a line of credit to buy a share portfolio, the interest costs are deductible against any dividends received. If your interest exceeds your dividends, the loss is deductible against your salary income — exactly like property.
The difference is scale and liquidity. Share portfolios can be adjusted quickly; selling a property to rebalance takes months and costs tens of thousands in agent fees and stamp duty. But for investors comfortable with margin, negatively geared share portfolios offer the same tax mechanics with far more flexibility.
When negative gearing makes sense — and when it doesn't
It makes sense when:
- You're in a high marginal tax bracket (37% or 45%), so the tax refund is substantial
- You're buying in a market with strong capital growth prospects
- The property's rental yield is likely to improve over time (rising rents moving toward neutrally or positively geared)
- You have the cash flow to sustain annual losses for 5–10+ years without financial stress
- Depreciation is significant (new property, or significant fixtures)
It doesn't make sense when:
- You're in a low marginal tax bracket (0–19%), making the tax saving minimal
- You're buying in a flat or declining market, so capital growth won't compensate for losses
- Your cash flow is already stretched — annual losses will compound financial stress
- The rental yield is so low that even optimistic capital growth assumptions don't make the numbers work
Common mistake: Many investors calculate "I'll get $9,000 back at tax time" without accounting for the $22,000 cash outflow that generated that refund. The net position is still a $13,000 annual loss. Don't let the refund feel like a benefit — it's a partial recovery of a larger loss.
The path to positive gearing
Most negatively geared properties will eventually become positively geared as rents increase and mortgage balances decrease. The timeline depends heavily on:
- The initial yield gap (how negatively geared you start)
- Annual rental growth (historically 3–4% in major Australian cities)
- Whether you're on principal and interest or interest-only repayments
- Refinancing activity and interest rate movements
A property that costs you $15,000 per year out of pocket today may become cash-flow neutral in 8–12 years as rents rise, and positively geared beyond that. The capital growth during that period is the investment thesis — the annual losses are the cost of holding the asset through to that outcome.
Model your negative gearing position
AlphaIQ calculates your true after-tax cash position for each investment property — including interest, depreciation, rental income, and your tax saving — so you know exactly what each property is costing and earning.
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