Negative Gearing in Australia: How It Works and Why It Matters

Negative gearing is one of the most debated policies in Australian property. It’s been praised as a driver of investment, criticised for fuelling house prices, scrapped once, and reinstated within two years after market disruption. Yet despite decades of political argument, it remains a core part of how many Australians build wealth through property. This isn’t just another “what is negative gearing” explainer, it’s a complete look at how the policy has shaped Australia’s housing market and what it actually means for investors today.

At its simplest, negative gearing occurs when your investment property costs more to hold than it earns in rent. That loss can be used to reduce your taxable income, lowering the amount of tax you pay. It’s a straightforward concept, but the implications, for your cash flow, your long-term returns, and the broader housing market, are far more complex.

In this guide, we’ll break down exactly how negative gearing works, walk through real numbers, explore its policy history and political debate, and help you decide whether it fits your strategy. If you’re considering an investment property, understanding how to structure your finance is just as important, which is where tailored advice on investment loans becomes critical.

Key Takeaways

• Negative gearing lets property investors offset rental losses against their taxable income, reducing their overall tax bill
• Australia is one of the few countries that allows unlimited negative gearing, the policy has been in place since 1936 with one brief removal in 1985–1987
• The political debate continues: Labor has historically pushed to limit negative gearing while the Coalition has defended it as essential for housing supply
• Negative gearing works best as a long-term strategy when combined with capital growth. The tax benefit alone rarely justifies the investment
• A mortgage broker can help you structure your investment loan to maximise tax efficiency while managing cash flow risk

What Is Negative Gearing?

Negative gearing is when the total costs of owning an investment property exceed the income it generates from rent. These costs can include mortgage interest, property management fees, maintenance, insurance, and depreciation.

When this happens, the net loss can be deducted from your overall taxable income, reducing the amount of tax you pay. Importantly, this is not a loophole, it’s a standard feature of Australian tax law.

In simple terms: negative gearing reduces your tax bill, but it doesn’t eliminate your loss. You are still out of pocket, just less so after the tax benefit.

For investors, understanding how to maximise deductions, including depreciation and interest structuring, is key to improving outcomes. You can explore this further in our guide tax benefits for investment property. 

How Does Negative Gearing Work? A Worked Example

Let’s put real numbers behind the concept.

Imagine a Sydney-based investor purchases a $700,000 investment property with a $560,000 loan at 6.2% interest. The property rents for $550 per week, generating $28,600 annually. The investor earns $120,000 per year.

Annual Costs:

• Mortgage interest: $34,700
• Council rates: $1,800
• Insurance: $1,500
• Property management: $2,300
• Maintenance: $1,500
• Depreciation: $8,000

 Total costs: $49,800

Calculation:

• Rental income: $28,600
• Total costs: $49,800
• Net loss: $21,200

At a marginal tax rate of 37%, the investor receives a tax reduction of approximately $7,844.

 Final Position:

Out-of-pocket loss after tax: $13,356

This is the critical point most investors overlook: negative gearing doesn’t make you money in the short term, it reduces your loss. The strategy relies on long-term capital growth exceeding that annual shortfall.

Before committing to a structure, it’s important to understand how different loan setups affect your position. Learn more about investment loans. 

Negative Gearing vs Positive Gearing

Negative gearing is just one side of the equation.

Positive gearing occurs when your rental income exceeds all expenses, meaning the property generates a profit. That profit is taxable, but it provides immediate cash flow.

Key Differences:

There’s also neutral gearing, where income and expenses roughly balance,  though this is less common in practice.

So which is better?

It depends on your goals. High-income earners often lean towards negative gearing to reduce tax while targeting long-term growth. Investors seeking income or lower risk may prefer positive gearing.

Your loan structure plays a big role here. Interest-only loans, for example, can increase short-term cash flow flexibility but may extend long-term costs. If you’re reviewing your setup, consider strategies around refinancing your investment property.

The History of Negative Gearing in Australia

One of the biggest misconceptions about negative gearing is that it was “introduced” at some point in modern policy. In reality, it has been part of Australia’s tax system since income tax was formalised in 1936. From the beginning, investors have been able to deduct losses from income.

The only major disruption came in 1985.

The Hawke-Keating government removed negative gearing for property (while retaining it for shares) as part of broader tax reforms. The aim was to reduce speculative investment and improve housing affordability.

What followed is still debated today.

Between 1985 and 1987:

• Rents increased significantly in some markets, particularly Sydney and Perth
• Vacancy rates tightened
• New rental construction slowed

Industry groups argued the removal had reduced rental supply and pushed up rents. By 1987, the policy was reversed, and negative gearing was reinstated.

Fast forward to recent years, and the debate has resurfaced repeatedly. During the 2016 and 2019 federal elections, Labor proposed limiting negative gearing to new properties only. The policy became highly politicised and was ultimately abandoned after both election losses.

As of today, negative gearing remains unchanged. The current government has ruled out reforms, but the policy continues to sit at the centre of Australia’s housing affordability debate.

Who Benefits from Negative Gearing?

Negative gearing is often portrayed as a strategy used exclusively by high-income earners, but the reality is more nuanced.

From a tax perspective, the biggest benefits go to those in higher income brackets. If you’re paying tax at 37% or 45%, each dollar of deduction is worth more than it is for someone on a lower rate.

However, data from the ATO shows that a large proportion of negatively geared investors earn between $80,000 and $180,000 per year,  not ultra-high-income earners

In total, over 1.3 million Australians use negative gearing across various income levels.

For first-time investors, the key consideration is whether the tax benefit justifies the cash flow impact. If your income is lower, the tax savings may not be enough to offset the annual loss, making the strategy harder to sustain.

If you’re unsure where you sit, speaking with a broker about your investment loans can help clarify your position.

The Risks and Downsides of Negative Gearing

While negative gearing can be effective, it comes with real risks, both at the individual and market level.

Individual Risks:

• Ongoing cash flow strain from covering the shortfall
• Interest rate increases widening the loss
• Vacancy periods with no rental income
• Property values failing to grow as expected
• Over-reliance on tax benefits rather than fundamental

Policy Criticisms:

• May contribute to higher property prices
• Benefits higher-income earners more in dollar terms
• Reduces government tax revenue
• Often applied to existing properties rather than new housing supply

The most common mistake investors make is treating negative gearing as a strategy in itself. It’s not. It’s a tax outcome that supports a broader investment strategy.

Is Negative Gearing Right for You?

Negative gearing can be effective, but only in the right circumstances

It may suit you if:

• You’re in a higher tax bracket (typically 37%+)
• You have stable income and surplus cash flow
• You’re investing for long-term capital growth (7–10+ years)
• You’re buying in a strong, growth-oriented market

It may not suit you if:

• You’re relying on tax refunds to stay afloat
• Your income is variable or uncertain
• You’re buying in a low-growth area
• You haven’t stress-tested your finances against rate rise

A key advantage of working with a broker is scenario modelling, comparing interest-only vs principal-and-interest, or different LVRs, to see how each impacts your after-tax position.

If you’re exploring options, speak with a mortgage broker in Sydney who can help you assess your situation alongside insights like the best suburbs to invest in Sydney. 

Tax Deductions You Can Claim on a Negatively Geared Property

One of the key advantages of negative gearing is the range of deductions available.

Common deductions include:

• Mortgage interest
• Council and water rates
• Landlord insurance
• Property management fees
• Repairs and maintenance
• Advertising for tenants
• Legal and accounting fees
• Pest inspections and strata fees

Depreciation (Often Overlooked):

Depreciation is typically the largest deduction and represents the wear and tear on the property and its fixtures. It’s a non-cash expense, meaning you don’t pay it directly, but it reduces your taxable income.

There are two main categories:

• Division 40: Plant and equipment (appliances, carpets)
• Division 43: Building structure

A professional depreciation schedule is essential to maximise this benefit.

For a deeper breakdown, see our guide to maximise tax benefits for investment property and how strategies like debt recycling can complement your approach.

The Political Debate: What Happens Next?

Negative gearing remains one of the most politically sensitive policies in Australia.

Arguments for Change:

Housing advocates argue that limiting negative gearing, particularly to new builds, could improve affordability and increase housing supply.

Arguments Against:

Industry groups claim that restricting the policy would reduce rental supply, push up rents, and penalise everyday investors, pointing to the 1985–1987 experience as evidence.

International Context:

Australia’s model is relatively generous. Many comparable countries either limit loss deductions or quarantine them to future income.

For now, the policy remains unchanged. From a practical perspective, investors should base decisions on current rules rather than potential future reforms.

Talk to a Sydney Mortgage Broker About Your Investment Strategy

Negative gearing can be a powerful tool, but only when it’s aligned with your broader financial strategy. The numbers matter: your income, your tax bracket, the property you choose, and how your loan is structured all influence the outcome.

At AFMS, we work with investors to model real scenarios , not just theoretical ones, helping you understand how different strategies affect your cash flow and long-term returns.

If you’re considering an investment property, the next step is a conversation. You can speak to a mortgage broker or explore your investment loan options to see what’s possible.

Frequently Asked Questions

What is negative gearing in simple terms?

Negative gearing is when your investment property costs more to own than it earns in rent. The loss can be deducted from your taxable income, reducing the amount of tax you pay.

Who introduced negative gearing in Australia?

Negative gearing wasn’t introduced by a single government. It has existed since income tax began in 1936. It was briefly removed in 1985 by the Hawke Government and reinstated in 1987.

Is negative gearing worth it?

It depends on your income, tax bracket, and long-term goals. It reduces your tax bill but doesn’t eliminate losses. For many investors, it works best when paired with strong capital growth. Learn more about investment loans. 

Can you negatively gear your first investment property?

Yes, you can. However, you need sufficient income to cover the shortfall and a long-term investment mindset. The tax benefit alone shouldn’t drive your decision.

What happens if negative gearing is abolished?

If it were removed, past experience suggests rental supply could tighten and rents may rise. Any modern change would likely include transitional rules, but the overall impact would depend on the specific policy design.