Negative Gearing Australia Explained: How It Reduces Your Tax

Negative gearing occurs when the costs of owning a rental property — mortgage interest, rates, insurance, repairs, depreciation — exceed the rental income it produces. The resulting net loss is deducted from your other income (typically your salary), reducing your taxable income and therefore your tax bill. The tax saving is real, but so is the cash outflow.

What is negative gearing?

Negative gearing is a tax strategy that arises when an investment (most commonly a residential property) generates a loss. In Australia, that investment loss is "deducted" from other income, reducing your overall taxable income. This is different from many other countries where investment losses can only be offset against investment gains.

For example: if you earn $120,000 in salary and your rental property generates a net loss of $15,000 (rent minus all expenses), your taxable income is $105,000. At the 32.5% marginal rate, this saves you $4,875 in tax — the "tax benefit" of negative gearing.

The term "gearing" refers to borrowing to invest. "Negatively geared" means the investment's income is less than its borrowing and ownership costs.

How does negative gearing work in Australia?

Deductible rental property expenses:

Mortgage interest (the single largest deduction for most investors)
Council rates and water charges
Landlord insurance
Property management fees (typically 7–10% of rent)
Repairs and maintenance (not capital improvements)
Building depreciation and capital works (Division 43)
Depreciation of plant and equipment (Division 40) — subject to eligibility rules for existing properties

What is not deductible:

The principal portion of mortgage repayments
Capital improvement costs (these are added to the cost base for CGT purposes)
Your own labour in maintaining the property

The CGT 50% discount: When you eventually sell a negatively geared property, any capital gain (after deducting the cost base) is subject to Capital Gains Tax. If you have owned the property for more than 12 months, a 50% CGT discount applies — meaning only half the gain is added to your taxable income. This discount is the second pillar of the negative gearing strategy: you accept annual losses in exchange for a lower-taxed capital gain on sale.

Step-by-step: calculating the tax benefit of negative gearing

Calculate gross rental income for the year (annual rent received).
List all deductible expenses: interest, rates, insurance, management fees, repairs, depreciation.
Calculate net rental income (or loss): gross income minus total expenses. If negative, this is your rental loss.
Apply the loss to your other income. Subtract the rental loss from your salary or other income to get taxable income.
Calculate tax on reduced taxable income using the ATO tax brackets.
Compare with tax on original income to determine your annual tax saving.
Factor in cash flow. Tax saving ≠ cash flow positive. If your monthly shortfall is $500 and your monthly tax saving is $250, you are still $250 out of pocket each month.

Common mistakes to avoid

Confusing tax savings with profit. Negative gearing reduces your tax, but you still have a net loss. The strategy only makes financial sense if capital growth exceeds the cumulative cash shortfall.
Overclaiming depreciation on properties purchased after 9 May 2017. Plant and equipment depreciation on second-hand residential properties is generally not available for properties purchased after this date. Get a quantity surveyor's report to understand what you can legitimately claim.
Ignoring vacancy periods. If the property sits empty, rental income falls but most expenses continue. Your actual loss may be higher than projected.
Forgetting that the CGT discount only applies to residents. Non-residents for tax purposes do not access the 50% CGT discount. If you sell after becoming a non-resident, your gain may be fully taxable.

Frequently asked questions

Does negative gearing guarantee a tax refund? Not automatically. Negative gearing reduces your taxable income — whether this results in a refund depends on whether your employer withheld more than the corrected tax liability. In most cases, yes, claiming rental losses through your tax return results in a refund, because your employer withheld based on your salary alone.

Is negative gearing available on shares and other investments? Yes. Negative gearing is not exclusive to property. If you borrow to invest in shares and the interest on the borrowing exceeds your dividend income, you have a negatively geared investment. The same principle applies — the loss offsets other income. However, share prices are more volatile, so the capital growth thesis is less predictable.

What is the difference between negative gearing and the CGT discount? They are two separate tax concessions that often work together. Negative gearing refers to offsetting annual investment losses against other income. The CGT discount refers to excluding 50% of a capital gain from tax on assets held for more than 12 months. You can benefit from both: annual tax relief through negative gearing, and a discounted capital gain when you sell.

Related calculator

Calculate capital gains tax on your investment property sale, including the 50% discount → Capital Gains Tax Calculator