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    Negative Gearing

    Offset investment property losses against your salary income

    What is Negative Gearing?

    Negative gearing occurs when the costs of owning an investment property (interest, rates, depreciation, repairs) exceed the rental income it generates. The resulting loss can be offset against your other income (e.g. salary), reducing your taxable income and therefore your tax bill.

    How it works

    1. 1You purchase an investment property with a loan
    2. 2Annual rental income is less than annual property expenses (interest + costs)
    3. 3The annual loss reduces your taxable income at your marginal tax rate
    4. 4You benefit from the tax saving now, betting on capital growth to profit on sale
    5. 5On sale, capital gains tax (CGT) applies, 50% CGT discount applies if held 12+ months

    Worked example

    You earn $120,000 a year (30% bracket; 32% with the Medicare levy).
Your investment property earns $24,000 a year in rent.
Annual costs: $38,000 (interest $30,000 + rates, insurance and management $8,000).
Net rental loss: $14,000.
Tax saving: $4,480 a year (32% of $14,000; the loss stays within the 30% bracket).
After-tax cost of holding: $14,000 – $4,480 = $9,520 a year (about $183 a week).

    Pros

    • Reduces taxable income, immediate cash benefit each year
    • Access to a larger asset base than savings alone would allow
    • 50% CGT discount on gains after 12 months
    • Depreciation deductions (Division 43 and 40) can be claimed on newer properties without cash outlay

    Cons

    • You are losing money each year. You are betting on capital growth to make the strategy profitable
    • Tax benefit only makes sense if you are in a high marginal tax bracket (37–47%)
    • Cash flow is negative. You must cover the shortfall from your salary every month
    • If property values fall, you may end up worse off than not investing at all

    Risks

    • Interest rate rises increase your annual loss and reduce tax effectiveness
    • Vacancy periods mean no rental income but costs continue
    • Capital growth is not guaranteed, some markets have been flat for years
    • ALP or future government policy could limit or remove negative gearing, political risk

    Tax treatment

    Rental losses are fully deductible against other income under Section 8-1 ITAA 1997. Depreciation deductions (Div 43 building allowance, Div 40 plant and equipment) reduce taxable income. On sale: CGT event A1, 50% discount applies if held 12+ months (individuals). Cost base includes purchase costs, capital improvements, and selling costs. ATO reference: QC 22521.

    Official references

    Keep exploring

    Negative Gearing Calculator Read property guides on the blog All strategies

    General Advice Warning

    The information on this site is general in nature and does not consider your personal circumstances, financial situation, or needs. Before acting on any information, you should consider its appropriateness having regard to your own situation and seek professional advice from a licensed financial adviser, mortgage broker, accountant, or solicitor.