Negative Gearing

Plain-English definition. Negative gearing occurs when the deductible costs of holding an investment property — interest, depreciation, rates, repairs, management fees — exceed the rental income, producing a tax loss that can be offset against your other taxable income.

How it works in Australia. Australia is one of few countries that allows full negative gearing of property losses against salary income, with no quarantine. The deduction is at your marginal tax rate — most powerful for the 37% and 45% brackets. Combined with the 50% CGT discount on sale, it has driven decades of investor demand. The ATO's Rental properties guide is the canonical reference. About 60% of investor loans are negatively geared at any given time.

Concrete example. An investor on a $180,000 salary (37% marginal + 2% Medicare = 39%) owns a $700,000 unit producing $30,000 rental income. Costs: $40,000 mortgage interest, $7,000 capital works depreciation, $4,500 strata, $2,500 rates, $2,400 management, $1,500 insurance, $1,200 maintenance = $58,600. Tax loss: $30,000 − $58,600 = −$28,600. Tax refund at 39% = $11,154. Real out-of-pocket cost: $17,446 per year, hoping capital growth more than covers it.

Common confusion. Investors think negative gearing makes them money. It doesn't — it just reduces a loss. A property that's $17k cash-negative after tax must grow at more than 2.5% per year on a $700k base just to break even on after-tax wealth before opportunity cost. The strategy only works in a rising market.