Negative Gearing Explained

Have you ever wondered how some Australians manage to build wealth through property without straining their finances?

Negative Gearing might just be the answer.

This strategy has become a powerful tool for property investors in Australia, offering potential tax benefits that could make a significant difference to your investment outcomes. If you're preparing to buy a property, understanding negative gearing is essential. But what if the rules change? What does it mean for your portfolio?

In this guide, we’ll walk you through negative gearing explained—its tax benefits, and its impact on the property market and renters. By the end, you’ll have the knowledge to make smarter, more strategic property decisions.

🎥 Watch First: Property Investing in Crisis?
Negative Gearing Explained!

Before diving in, watch this quick explainer video to get a visual overview of how negative gearing works and why it’s so talked about in Australia.

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1. What is Negative Gearing and Why Should Investors in Australia Care?

In property investment, knowing how to make it work in your favour is crucial, right? Negative gearing is when your rental property costs more to maintain than it earns. But why would anyone want to invest in a property that doesn’t pay for itself immediately? The answer lies in the potential tax benefits. By offsetting these losses against your other income, you could reduce your tax bill and make property ownership more affordable in the long run. With around 950,000 Aussie landlords reporting rental losses every year, negative gearing is helping investors stay in the market and aim for bigger gains down the line.

In simple terms, Negative gearing occurs when you borrow to invest, and the income doesn’t cover the loan costs.

2. How Does Negative Gearing Work as an Investment Strategy in Property?

So, how does negative gearing actually work? Let’s break it down. Imagine your rental property earns $20,000 a year, but your expenses—mortgage interest, management fees, and costs of maintaining the property—total $30,000. That’s a $10,000 shortfall. Now, instead of taking this loss as a hit to your finances, negative gearing allows you to offset against other income like your salary. If you’re in a 37% tax bracket, this could reduce your tax by $3,700, making it easier to keep the property long enough to reap the rewards when its value rises.

💡 Plain English Tip: Gearing just means using borrowed money to buy an investment like a property. Negative gearing means your property costs more than it earns right now—but that can help at tax time.

3. What Tax Benefits and Deductions Can You Claim Through Negative Gearing?

What’s in it for you when it comes to tax? The main benefit of negative gearing is that it can significantly reduce your taxable income. By offsetting rental losses, you pay less tax, it can help manage ongoing property tax liabilities.  The Australian Taxation Office provides guidelines on what deductions apply under negative gearing. For many investors, negative gearing makes holding onto property easier, giving them time to wait for the property to appreciate. However, there are limits—some costs like private expenses can’t claim under tax deductions.  It’s a strategy that supports long-term thinking, letting investors focus on capital growth instead of worrying about immediate cash flow. Investors should also account for CGT (Capital Gains Tax) when selling an appreciating property. You may trigger tax events when you eventually sell the property, so planning is key. When the property is eventually sold, capital gains tax may apply to the profits made.

⚠️ Tax Watch-Out: You can’t claim everything. Private expenses, like personal phone bills, can’t be deducted—even if you use them for property management.

4. Negative Gearing vs Positive Gearing: Understanding the Investment Differences

Have you ever heard of positive gearing? While negative gearing lets you claim losses, an investment is positively gearedwhen it earns more than it costs to maintain.. Sounds like a win, doesn’t it? But it also means paying tax on those profits. For some, positive gearing offers steady income now, while negative gearing is better suited for those who can wait for long-term capital gains. So, which one’s better? It depends on your goals. Are you looking for immediate cash flow, or are you more focused on long-term growth?

Investment Example: Comparing Positive Gearing vs Negative Gearing Outcomes

Imagine two investors: one with a negatively geared property and another with a positively geared property. The negatively geared investor can claim a $10,000 loss, saving on tax while holding out for capital growth. Meanwhile, the positively geared investor makes $5,000 in profit, but that’s also taxable income. Each strategy has its perks, so ask yourself: do you want cash flow now or potential for bigger gains later? A balance between negative gearing and capital gains goals often delivers better outcomes.

5. How to Use Negative Gearing as a Strategic Investment Tool

Wondering if negative gearing could work for you? Here’s the trick: it’s all about choosing properties likely to appreciate. The aim isn’t to stack up losses—it’s to manage them smartly while your property’s value grows. Understanding the negative gearing benefits helps you make informed investment decisions. Focusing on high-demand locations, where growth potential is stronger, can help offset short-term costs with future gains. Partnering with a trusted advisor, like Get RARE Properties, can help you identify the right properties and locations for successful negative gearing. This approach must align with your overall investment strategy to remain financially sustainable.

6. Can You Reduce Your Taxable Income Using Negative Gearing?

Yes! Negative gearing can directly lower your taxable income. How? When your rental income doesn’t cover the income it generates, the shortfall—often called a “net rental loss”—can be deducted from your other income. This means you could end up paying less tax overall. For many Aussies, it’s a win-win: they get to build a property portfolio while benefiting from tax savings, even if the property isn’t immediately profitable.

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7. When is an Investment Property Considered Negatively Geared?

Have you ever asked yourself if your property qualifies as “negatively geared”? It’s simple: a property is negatively geared when the property exceed its income in ownership costs than the rental income. Typical expenses include mortgage interest, property management fees, and maintenance. But why choose a property that doesn’t pay for itself straight away? The idea is that in the long run, the property’s value will go up, making those short-term costs worthwhile.

Real Case Study: How a Young Investor Used Negative Gearing to Make a Loss Work

Take Emma, a young professional earning $90,000 a year. She bought an investment property with a rental income of $18,000, but her yearly costs were $25,000. By using negative gearing, she could offset her $7,000 loss against her other income, reducing her income tax liability through this strategy. Negative gearing made property ownership viable for Emma, giving her a path to potential growth as the property appreciates. Her overall net investment strategy focused on long-term growth despite initial losses.

📺 Prefer video? Our explainer, "Property Investing in Crisis? Negative Gearing Explained!", breaks down this exact example visually—making the tax and cash flow implications crystal clear.

👉 Watch here

8. Negative Gearing in Australia: Key Pros and Cons for Property Investors

Pros:

• Reduces taxable income, especially for those in higher tax brackets.

• Encourages holding onto properties, aiming for capital growth.

• Provides a way for middle-income Australians to enter the property market.

• Investors who make a loss today may benefit through future capital gains and tax savings.

• Long-term owners may also benefit from the capital gains tax discount if they hold property for over a year.

Cons:

• High risk in areas where property value may not grow enough to cover losses.

• Reliance on rental income to offset costs, which can be unpredictable.

• Can strain cash flow, especially if interest rates or property expenses rise.

9. The Impact of Negative Gearing on Renters and the Housing Market

So, what happens to the market if everyone’s using negative gearing? Negative gearing fuels demand for rental properties, helping to stabilise rental prices. If fewer investors use negative gearing, rental housing could shrink, driving up rents. Changes in negative gearing policy could lead to a chain reaction, impacting both the renter and landlord ecosystem. This strategy doesn’t just shape individual portfolios; it can influence the broader property market, with ripple effects on affordability.

10. Why Get RARE Properties is Your Trusted Partner for Strategic Investment Advice

Navigating negative gearing isn’t always straightforward, but that’s where Get RARE Properties comes in. With years of experience, we specialise in finding high-growth investment properties and providing tailored advice to meet your financial goals. We work closely with your accountant or financial advisor to ensure everything aligns with your tax strategy. Partnering with Get RARE Properties means you get the insights and expertise needed to build a sustainable, profitable property portfolio.

Why Get RARE Properties is Your Trusted Partner for Strategic Investment Advice

Negative gearing is more than a tax strategy—it’s a long-term investment approach that can make property ownership viable and profitable. Here’s what to remember:

• Understanding Costs: Negative gearing is when property expenses exceed rental income, allowing you to claim the loss against other income. These deductions can be applied within the same financial year, improving short-term cash flow.

• Tax Advantages: This setup provides tax relief, helping you maintain cash flow.

• Market Impact: Changes in negative gearing policy can affect both housing supply and rental prices.

• Smart Investment Choices: Picking the right property is crucial. With guidance from Get RARE Properties, you can make well-informed investment decisions.

🎬 Still got questions? Revisit our quick 6-minute breakdown:
👉 Property Investing in Crisis? Negative Gearing Explained!

It’s a great recap before booking your personalised strategy call.

When planning long term, be aware of how gearing and capital gains tax intersect. It’s always worth keeping in mind that tax laws can change, affecting your deductions. Want to see if negative gearing could work for you? Book a strategy call with Get RARE Properties today, and let’s explore your investment options together.

Disclaimer: This article is general information only; seek professional tax advice before making investment decisions.