Negative Gearing Australia 2025: How It Works, The Tax Benefits, and Is It Worth It?

What Is Negative Gearing?

Negative gearing occurs when the costs of owning an investment property (or other income-producing asset) exceed the income it generates. The resulting loss can then be offset against your other income — typically your salary or wages — reducing the amount of income tax you pay.

It is called "gearing" because it involves using borrowed money (a loan) to fund the investment. When the investment income is less than the interest and costs of the loan, you are negatively geared.

Negative gearing is one of the most debated tax policies in Australia. Property investors argue it is a legitimate way to build long-term wealth while accepting short-term losses. Critics argue it inflates property prices and benefits high-income earners disproportionately. Regardless of the political debate, it remains a legal tax strategy available to all Australian investors.

How the Tax Benefit of Negative Gearing Works

The tax benefit of negative gearing is determined by your marginal tax rate. The higher your income, the more valuable the deduction, because higher-income earners are taxed at higher rates.

Here is how the same $15,000 rental loss affects taxpayers at different income levels:

This table illustrates why negative gearing is particularly attractive to high-income earners — the government effectively subsidises a greater portion of their investment losses.

How to Calculate Your Negative Gearing Position

The calculation is straightforward once you have identified all your income and deductible expenses:

Step 1 — Calculate Your Rental Income

Include all rent received during the financial year. If your property was vacant for some weeks, you only count rent actually received, not rent you could have received. Also include any insurance payouts for loss of rent.

Step 2 — Add Up All Deductible Expenses

This is where many investors leave money on the table by not claiming everything they are entitled to (see the full list below).

Step 3 — Calculate the Net Position

Net rental income (or loss) = Rental income − All deductible expenses

If the result is negative, you are negatively geared. This loss is added to (or subtracted from) your total assessable income when you lodge your tax return.

Complete Example

What Can You Claim on an Investment Property?

Australian property investors can claim a wide range of expenses. These fall into two categories: immediately deductible expenses (claimed in full in the year incurred) and capital expenses (claimed over time through depreciation).

Immediately Deductible Expenses

• Loan interest — The interest portion of your mortgage repayments (not the principal repayment)
• Property management fees — Agent fees, letting fees, advertising for tenants
• Council and water rates
• Landlord insurance and building insurance
• Repairs and maintenance — Fixing a broken tap, repairing a fence, repainting (but not improvements — see below)
• Pest control
• Garden and lawn maintenance
• Accounting fees for your rental income tax return
• Body corporate fees (for strata properties)
• Land tax (in states where applicable to investment properties)
• Travel expenses to inspect your property — note: from 2017, travel deductions for residential rental properties are no longer allowed unless you are in the business of property management

What Is NOT Immediately Deductible

• Purchase costs (stamp duty, legal fees) — these are added to the cost base for CGT purposes
• Capital improvements (a new kitchen, adding a bathroom) — these are depreciated over time or form part of the cost base
• Principal repayments on your mortgage

Depreciation — The Non-Cash Deduction Many Investors Miss

Depreciation is a deduction for the wear and tear of the building and items within it. It is a non-cash deduction, meaning you do not have to spend money to claim it — you simply recognise that the building and its contents are declining in value over time.

Two Types of Depreciation for Property Investors

1. Building allowance (Division 43) — You can claim 2.5% per year on the original construction cost of eligible buildings (generally those built after July 1985 for residential properties). On a property that cost $300,000 to build, this is a $7,500 annual deduction.
2. Plant and equipment (Division 40) — Items like carpets, hot water systems, air conditioners, ovens, and blinds are depreciated at varying rates depending on their effective life. Note: from 1 July 2017, second-hand plant and equipment in residential rental properties (purchased from a previous owner) can no longer be depreciated.

To maximise your depreciation claims, you should commission a quantity surveyor's depreciation schedule. A good quantity surveyor will identify depreciation items that your accountant may miss, and the fee for the schedule is itself tax deductible. The cost (typically $600–$900 for a residential property) often delivers thousands of dollars in additional annual deductions.

The Risks of Negative Gearing

Negative gearing is a legitimate strategy, but it comes with real risks that are sometimes understated in popular financial commentary:

• Cash flow pressure — You are spending more than you earn from the property every year. You must have reliable income from other sources to fund the shortfall.
• Interest rate risk — If interest rates rise significantly (as they did in 2022–2023), your losses and cash outflow increase substantially.
• Capital growth dependency — The strategy only makes financial sense if the property grows in value enough to offset years of accumulated losses. In flat or declining markets, you may accumulate losses without a corresponding capital gain.
• Policy risk — Negative gearing has been subject to ongoing political debate in Australia. Any future policy changes could affect the tax treatment of investment property losses.
• Vacancy risk — Periods of vacancy mean no rental income while costs continue. Your annual loss increases significantly if the property sits empty for extended periods.

Positive Gearing vs Negative Gearing

Positive gearing (or positive cash flow property) is when your rental income exceeds your costs, leaving you with a net profit. This profit is taxable income, but you have a property that pays for itself and puts money in your pocket each year.

Is Negative Gearing Worth It in 2025?

Whether negative gearing makes sense for you depends on several personal factors. Here is a framework for thinking it through:

Negative gearing is likely worthwhile if:

• You are in the 32.5%, 37%, or 45% marginal tax bracket (higher earners get the most benefit)
• You have strong, secure employment income to cover the ongoing cash shortfall
• You are investing in a location with credible long-term capital growth prospects
• You have a long investment horizon (10+ years) to allow sufficient capital growth to justify the losses
• You have adequate financial buffers for vacancies, interest rate rises, and unexpected repairs

Negative gearing may not be right for you if:

• Your income is below $45,000 (the tax saving is limited and the cash flow burden is the same)
• You have high levels of existing debt (credit cards, personal loans) — these should be prioritised first
• Your employment is insecure — one job loss can make funding ongoing rental losses very difficult
• You are buying in a market with limited capital growth prospects