Negative gearing explained
Negative gearing is a term you’ve likely heard in the context of Australian property investment, but what does it really mean—and how does it impact investors, the housing market, and taxpayers? In this article, we’ll break down the concept of negative gearing, how it works in practice, and the pros and cons associated with it.
What is negative gearing?
In simple terms, negative gearing occurs when the costs of owning an investment property exceed the income it generates—usually through rent. This results in a net loss for the investor. However, under Australian tax law, that loss can be deducted from your other income, such as wages or salary, reducing your taxable income and your tax bill.
Example: If your rental property earns $25,000 a year in rent, but your total expenses (loan interest, maintenance, insurance, etc.) are $30,000, you’ve made a $5,000 loss. If you earn $90,000 from your job, you can deduct that $5,000, reducing your taxable income to $85,000.
What can be claimed as a deduction?
The following investment-related costs are typically deductible:
- Mortgage interest
- Council rates
- Property management fees
- Repairs and maintenance (not renovations)
- Depreciation on assets (e.g., appliances, carpets)
- Insurance
- Legal and accounting fees
Why do investors use negative gearing?
Despite short-term losses, many investors use negative gearing as part of a long-term capital growth strategy. The idea is that the property's value will appreciate over time, allowing them to:
- Offset losses now with tax deductions
- Profit later by selling the property at a higher price
This strategy assumes that capital gains (the profit from the eventual sale) will outweigh the annual losses.
The role of Capital Gains Tax (CGT)
If you sell an investment property for more than you paid, the profit is considered a capital gain. In Australia, if you hold the property for more than 12 months, you may receive a 50% CGT discount, meaning you only pay tax on half of the gain. This tax treatment complements negative gearing and is a key reason the strategy appeals to long-term investors.
Who benefits from negative gearing?
Negative gearing is often used by:
- High-income earners looking to reduce taxable income
- Investors with multiple properties
- Those confident in long-term capital gains
It’s less useful for:
- Lower-income earners who receive little benefit from deductions
- Investors who cannot comfortably absorb ongoing losses
- Those seeking short-term cash flow or instant returns
Criticism and debate
Negative gearing has been a contentious political issue in Australia. Critics argue that:
- It distorts the housing market by encouraging speculative investment
- It favours the wealthy, contributing to inequality
- It reduces government revenue, as billions are lost annually in tax deductions
Supporters contend that:
- It encourages investment in rental housing, helping meet demand
- Removing it could reduce rental supply and increase rents
- The system is fair, as any income-generating investment allows loss deductions
Governments have debated reform, with proposals ranging from limiting the deductions to new builds only, to removing negative gearing altogether—though no major changes have been made at a federal level to date.
Risks and considerations
Before jumping into a negatively geared investment, it’s vital to consider:
- Cash flow: Can you afford to cover the losses if interest rates rise or if the property is vacant?
- Market conditions: Is the property likely to increase in value over time?
- Tax changes: Future government policy could reduce or eliminate benefits
- Alternative strategies: Positive gearing (where rental income exceeds expenses) might suit investors seeking steady income
Negative gearing can be a powerful tool for reducing taxable income and building long-term wealth—but it’s not a guaranteed path to success. It requires careful financial planning, a strong understanding of the property market, and the ability to sustain losses over several years. For those in the right financial position, it can complement a broader investment strategy. But for others, especially those chasing short-term gains, it may pose more risk than reward.
Always consider seeking advice from a financial adviser or accountant to determine whether negative gearing is right for your personal circumstances.
