Negative gearing is a term often discussed in both positive and negative contexts. But what does it actually mean? Could it be a strategy for building wealth and reducing your tax liability?

By the end of this article, you should have a clearer understanding of whether negative gearing aligns with your financial goals. As always, we recommend seeking tailored advice from your accountant.

What Is Negative Gearing?

In simple terms, negative gearing refers to a situation where the expenses associated with an investment exceed the income it generates—typically due to interest on a loan used to fund the investment. This loss may be tax-deductible.

Let’s consider a common example involving an investment property:

Example: $600,000 Property | 6% Interest | 90% Loan-to-Value Ratio

Item	Amount (AUD)
Rental Income	31,200
Landlord Insurance	(600)
Council Rates	(2,200)
Water Rates	(1,900)
Property Management Fees	(2,400)
Repairs & Gardening	(2,000)
Net Income (Before Interest & Depreciation)	22,100
Interest on Mortgage	(32,400)
Net Loss (Negative Gearing)	($10,300)

The tax benefit you receive from this loss depends on the level of income you earn and your marginal tax rate:

Marginal Tax Rate (2025 Rates) (Including Medicare Care Levy)	0% Income Under $18,200	18% Income Under $45,000	32% Income Under $135,000	39% Income Under $190,000	47% Income above $190,000
Tax Benefit (Simplified & demonstration purposes only)	$nil	$1,854	$3,296	$4,017	$4,841
Net Cash Outflow	($10,300)	($8,466)	($7,004)	($6,283)	($5,459)
Weekly Cost (After Tax Benefit)	$198.08	$162.42	$134.69	$120.83	$104.98

Note: This example excludes building depreciation for simplicity. However, claiming depreciation can further reduce your cash outflow—though it may increase your capital gain liability upon sale.

Why Consider Negative Gearing?

Despite the cashflow loss, investors may choose negative gearing in anticipation of long-term profit (aka. capital gain). If the property increases in value enough over time to offset the annual losses, the strategy can be worthwhile and build your overall wealth.

Common Misconceptions

• “You get the full loss back as a tax refund.”
  Not quite. You only receive a portion of the loss based on your tax rate. The remainder is a real cash expense.
• “Loan repayments are deductible.”
  It is only the interest portion of any loan repayment that is deductible—not the principal/loan reduction amount.
• “It reduces child support obligations.”
  Not anymore. Child support and government benefits are based on Adjusted Taxable Income, which adds back rental losses and other deductions.

When Is Negative Gearing Suitable?

It may be appropriate if you:

1. Have surplus cashflow beyond your living needs.
2. Are disciplined with budgeting and tax obligations.
3. Use interest-only loans and direct surplus funds toward non-deductible debt (e.g., your personal home loan).
4. Have a strong track record of selecting growth-oriented investments.

When Might It Be Unsuitable?

Negative gearing may not be suitable if:

1. Your income is uncertain (e.g., due to family changes, job transitions, or new business ventures).
2. You're investing solely for tax benefits rather than asset quality.
3. The property is in a high-risk area (e.g., mining towns).
4. Your tax rate is low, reducing the benefit of deductions and increasing your weekly holding costs.
5. The property incurs large annual cash losses, creating financial strain.
6. The property requires frequent, costly repairs.
7. You’re vulnerable to interest rate increases (limited surplus personal cashflow).
8. You haven’t received proper ownership or structuring advice.

Conclusion

Negative gearing is neither inherently good, nor bad. It can be a powerful tool for the right investor with the right strategy and financial position.

If you have questions or would like to explore whether this approach suits your circumstances, please don’t hesitate to contact our office.