Negative gearing is one of the most talked-about and least understood parts of Australian investing. At its core it is simple: if an investment costs more to hold than it earns, the loss reduces your taxable income. But the tax saving is not free money — it is a real cash-flow loss you are betting will be made up by capital growth. Here is how it works.
What "negatively geared" means
An investment is negatively geared when the income it produces (for a property, the rent) is less than the cost of holding it (loan interest plus expenses like rates, insurance, management and maintenance).
That shortfall is a loss. Australian tax rules let you offset that loss against your other income — like your salary — which lowers your taxable income and therefore your tax.
A worked example
Say you own an investment property:
- Rent received: $25,000 a year.
- Costs: $30,000 loan interest + $5,000 other expenses = $35,000.
- Loss: $35,000 − $25,000 = $10,000.
That $10,000 loss comes off your taxable income. If your marginal rate is 37% plus the 2% Medicare levy, the loss saves you about $3,900 in tax. So your real out-of-pocket cost for the year is roughly $10,000 − $3,900 = $6,100, not the full $10,000.
The Negative Gearing Calculator works this through on your numbers, and the Salary Tax Calculator shows the marginal rate the saving is worth.
The part people forget: it is still a loss
The tax break reduces the pain of the loss — it does not erase it. You are still $6,100 out of pocket in the example. Negative gearing only makes sense if you expect capital growth over time to more than cover those holding costs.
When you sell, that growth is taxed as a capital gain, but if you have held the asset more than 12 months you generally get the 50% CGT discount — see the Capital Gains Tax Calculator.
The risks
- Cash flow. You need to fund the shortfall every month, regardless of the tax refund that comes once a year.
- Interest rates. A rate rise increases your loss. Stress-test the holding cost at a higher rate.
- No guaranteed growth. If the asset does not appreciate, you have simply made a loss with a partial tax rebate.
- It is not a strategy by itself. Negative gearing is a tax consequence of borrowing to invest, not a reason to invest.
Before buying, it is worth checking the rental return with the Rental Yield Calculator so you know how big the shortfall is likely to be.