Negative gearing is one of the most discussed — and most misunderstood — features of Australian property investment. The concept is simple: when the costs of owning an investment property exceed the rental income it earns, the ATO allows you to deduct that shortfall against your other income, reducing your tax bill. What most investors don't fully internalise is that a tax deduction still requires a real cash outflow. This article explains how the mechanism works, how much the benefit is actually worth at different income levels, and what the true weekly cost of a negatively geared property looks like.
What Negative Gearing Means
A property is negatively geared when its holding costs exceed its rental income. The holding costs include loan interest, council rates, insurance, property management fees, maintenance and depreciation. If those costs total $52,000 a year and the property earns $28,600 in rent, the investor has a net rental loss of $23,400.
Under section 8-1 of the Income Tax Assessment Act 1997 (Cth), losses from a rental property held for income-producing purposes are deductible against your other assessable income — typically your salary or wages. So the $23,400 loss is applied against your taxable income, reducing the tax you owe. The amount you save depends entirely on your marginal tax rate.
It is worth being precise about what is happening: you are spending real money (the cash shortfall between rent received and costs paid) in exchange for a partial tax refund. The tax system subsidises the holding cost; it does not eliminate it. The investment thesis requires that capital growth on the property over time exceeds the cumulative net cash cost of holding it.
How Your Marginal Rate Determines the Benefit
Australia's personal income tax system is progressive. As at the 2024–25 income year, the marginal rates (excluding the 2% Medicare levy) are:
| Taxable income | Marginal rate | Rate incl. Medicare levy |
|---|---|---|
| $0 – $18,200 | 0% | 0% |
| $18,201 – $45,000 | 19% | 21% |
| $45,001 – $135,000 | 32.5% | 34.5% |
| $135,001 – $190,000 | 37% | 39% |
| $190,001+ | 45% | 47% |
The tax saving from a rental loss equals the loss multiplied by your marginal rate. An investor earning $130,000 (falling in the 32.5% bracket) who has a $23,400 rental loss saves approximately $8,073 in tax (32.5% × $23,400 = $7,605, plus 2% Medicare levy savings of $468 = $8,073 total). An investor earning $200,000 in the 45% bracket saves $10,998 on the same loss. The same property, the same cash outlay — but a meaningfully different government subsidy depending on where your income sits.
Worked example: $800,000 property at $130,000 income
Consider an $800,000 investment property in a capital city, purchased with a 20% deposit ($160,000) and a $640,000 interest-only loan at 6.44% per annum (indicative as at mid-2026). Rent is $550 per week ($28,600 per year).
| Item | Annual | Weekly |
|---|---|---|
| Rental income | $28,600 | $550 |
| Loan interest (6.44% on $640k) | –$41,216 | –$793 |
| Council rates | –$1,800 | –$35 |
| Landlord insurance | –$1,400 | –$27 |
| Property management (8.5%) | –$2,431 | –$47 |
| Repairs & maintenance (allowance) | –$1,500 | –$29 |
| Depreciation (2.5% on $300k building) | –$7,500 | –$144 |
| Net rental loss | –$27,247 | –$524 |
| Tax saving (34.5% incl. Medicare) | +$9,400 | +$181 |
| True cash cost after tax | –$17,847 | –$343 |
The investor is out of pocket $343 per week in real cash, after the tax benefit. The depreciation deduction of $144 per week is non-cash — it reduces the tax bill without requiring a payment — which is why it is treated separately below.
Key Deductible Expenses
Not all costs associated with a rental property are deductible in the same way. The ATO distinguishes between expenses deductible in the year they are incurred and capital expenses deductible over the effective life of the asset.
Loan interest is typically the largest deduction on a negatively geared property and is deductible in full for an interest-only loan. For principal-and-interest loans, only the interest component is deductible — the principal repayment is a capital expense.
Council rates, insurance and property management fees are straightforwardly deductible in the income year they are paid. Property management fees typically run 7–9.5% of gross rent plus GST for ongoing management, with separate letting and lease-renewal fees on top.
Repairs and maintenance are deductible when they restore the property to its condition immediately before the damage or wear occurred. Initial repairs to fix defects that existed at the time of purchase — and capital improvements that add value — are not immediately deductible. They are depreciated over their effective life instead.
Depreciation is the big non-cash deduction that materially changes the economics of new property investment. It covers two categories:
- Building allowance (Division 43): 2.5% per year of the original construction cost on buildings constructed after 15 September 1987 (residential). On an established property built for $300,000, this produces a $7,500 deduction each year with zero cash outflow — improving your after-tax position without touching your bank account.
- Plant and equipment (Division 40): covers depreciable assets such as carpets, hot water systems and blinds. For properties purchased after 9 May 2017, second-hand (established) residential properties can only claim Division 40 depreciation on assets purchased new after acquisition. New properties are unaffected.
A quantity surveyor's depreciation schedule (typically $600–$900 for a residential property) is deductible in the year it is prepared and generally pays for itself many times over in first-year depreciation claims. Verify the position for your specific property and construction date with your tax adviser.
The Real Cash Cost vs the Apparent Cost
The distinction between cash and non-cash deductions is important when working out what a negatively geared property actually costs you week to week.
In the worked example above, the $27,247 net rental loss includes $7,500 of depreciation — a deduction that requires no cash payment. Strip the non-cash depreciation out and the cash shortfall (actual money leaving your account) is $19,747 per year, or $380 per week. The tax saving of $9,400 (at 34.5%) reduces this to a true cash cost of roughly $343 per week.
The way to think about it: you are paying $343 per week in cash to hold an $800,000 asset, while someone else (your tenant) covers most of your interest. If the property grows in value by more than that cumulative holding cost over your investment period, the strategy works. If it does not, the tax benefit does not rescue the outcome — it only reduces the loss.
When Does Positive Gearing Kick In?
A property becomes positively geared when rental income exceeds all holding costs — meaning the investment contributes to your income rather than drawing from it. This is determined by the relationship between the gross rental yield and the net financing cost.
At a 6.44% interest-only rate with 80% LVR, the interest cost alone represents approximately 5.15% of the property's value (6.44% × 80%). Add rates, insurance, management fees and maintenance — roughly 1.0–1.5% of value — and a property needs to generate a gross yield of around 6.2–6.7% just to cover cash costs (before depreciation). At $550 per week on an $800,000 property, the gross yield is 3.58% — well below the break-even threshold, which is why this example is firmly negatively geared.
Properties that positively gear tend to be in higher-yield locations (typically regional, lower-growth markets) or those purchased some years ago at a lower entry price relative to current rents. As rents grow over time and the loan balance reduces (for principal-and-interest borrowers), the gearing position of a property typically shifts from negative toward neutral and eventually positive — assuming interest rates remain stable.
You can model your own property's break-even yield and weekly cash flow using the free LenderBridge Negative Gearing Calculator. It adjusts dynamically for your income, loan rate, property value and deductible expenses.
For a broader view of how investment borrowing fits into your overall financing position, see the Residential Investment tool.
Frequently Asked Questions
Can you negatively gear a property held in a trust or SMSF?
The mechanics work differently across structures. A discretionary trust cannot distribute a tax loss to its beneficiaries — losses are quarantined inside the trust and carried forward to offset future trust income. An SMSF can hold negatively geared property but the fund's other income must absorb the shortfall; the loss cannot be distributed to members personally. In both cases the tax benefit is structurally different from negative gearing held in personal name, where losses offset your individual taxable income immediately. Verify the implications for your specific structure with a tax adviser. For more on SMSF borrowing, see SMSF Property Loans Explained.
What happens if you sell a negatively geared property at a loss?
A capital loss on disposal is quarantined and can only be offset against capital gains — it cannot be applied against ordinary income. If you hold a negatively geared property for more than 12 months as an individual and sell at a profit, the 50% CGT discount applies to reduce the taxable gain. Selling at a loss produces a capital loss that carries forward indefinitely to offset future capital gains. The annual rental deductions (income losses) and the capital account outcome on disposal are treated entirely separately under the tax law.
Do all Australian states treat negative gearing the same way?
Negative gearing is a federal income tax concept governed by the Income Tax Assessment Act 1997 (Cth) — it operates identically across all states and territories. There is no state-level variation in how rental losses are treated for income tax purposes. However, states vary significantly on land tax (an annual holding cost), stamp duty on acquisition, and some have introduced surcharges for foreign investors. Those state-level costs affect the economics of a negatively geared investment but do not alter the federal tax treatment of the rental loss itself. See Stamp Duty in Australia for detail on acquisition costs by state.