Negative gearing on investment property in Australia
What is negative gearing?
An investment property is negatively geared when the costs of owning and managing it — mortgage interest, council rates, insurance, repairs, property management fees, and depreciation — exceed the rental income it earns. The resulting net loss can be deducted against your other assessable income (such as salary or business income), reducing the tax you owe for that year.
By contrast, a positively geared property produces more rental income than its costs, generating a taxable profit each year.
How the deduction works
Suppose your investment property earns $26,000 in rent annually but costs $38,000 to hold (interest, rates, insurance, management fees, and depreciation). The $12,000 net loss is deducted from your taxable income. If you are in the 37% marginal tax rate bracket, the deduction reduces your tax bill by approximately $4,440 that year.
Allowable deductions include:
- Mortgage interest (the main driver in most negatively geared properties)
- Borrowing costs amortised over five years or the loan term, whichever is shorter
- Depreciation on the building structure (for properties built after 15 September 1987) and on plant and equipment items
- Repairs and maintenance — note that improvements are not immediately deductible but are added to the cost base
- Property management fees, council rates, water charges, landlord insurance, and strata levies
Capital repayments on the loan are not deductible — only the interest component.
Interaction with capital gains tax (CGT)
Negative gearing is typically adopted in expectation of capital growth — the investor accepts annual cash-flow losses now in return for a larger profit when the property is sold. However, that gain is subject to capital gains tax.
If you hold the property for more than 12 months before selling, you are eligible for the 50% CGT discount — only half the net capital gain is added to your taxable income in the year of sale. This discount is available to individuals and trusts (but not to companies).
The deductions you have claimed each year do not reduce your cost base directly, but depreciation deductions on the building structure (Division 43) do reduce the cost base, potentially increasing the assessable capital gain when you sell.
Risks to consider
Negative gearing is not a guaranteed wealth-building strategy. The key risks include:
- Interest rate rises — if borrowing costs increase significantly, annual losses widen and may become unsustainable
- Vacancy periods — weeks or months without a tenant still require you to meet loan repayments
- Falling property values — if the property does not appreciate, the accumulated tax deductions may not offset the capital loss on sale
- Legislative risk — the availability and structure of negative gearing and the CGT discount are subject to government policy change
Negative gearing and your tax return
Rental income and deductions are reported at the rental schedule in your individual tax return (or via your tax agent). The Australian Taxation Office (ATO) publishes a guide to rental property deductions each year. Keep records of all income and expenses — receipts, bank statements, loan statements — for at least five years.
If you own the property through a self-managed superannuation fund (SMSF), different rules apply and negative gearing losses cannot be offset against other income outside the fund.
Getting advice
Property investment decisions intersect tax law, lending, and personal cash-flow planning. Speaking with a registered tax agent or financial adviser before purchasing an investment property is recommended — especially to model the after-tax cash flow under different interest rate scenarios.