Negative gearing is treated as either a magic tax loophole or a national scandal, depending on who's talking. It is neither. It is a straightforward application of a general tax principle — losses from producing income are deductible against other income — combined with a bet on capital growth. The tax part is real but smaller than most people think; the bet is the whole game.
The mechanism in one paragraph
A property is negatively geared when the costs of holding it (loan interest, rates, insurance, management, maintenance, depreciation) exceed the rent it earns. That loss is deducted from your salary income, which reduces your tax at your marginal rate. The refund offsets part of the loss — never all of it, because your marginal rate is never 100%. You are still losing money each year; you're just sharing the loss with the tax office.
A worked example with real numbers
An investor on a $150,000 salary (marginal rate 39% including Medicare levy) buys a $650,000 unit, renting at $520/week, with a $520,000 interest-only loan at 6%.
The year's income and outgoings:
| Item | Amount |
|---|---|
| Rent (52 weeks at $520) | +$27,040 |
| Loan interest (6% of $520,000) | −$31,200 |
| Rates, insurance, management, maintenance | −$7,000 |
| Cash shortfall | −$11,160 |
| Depreciation (paper deduction) | −$8,000 |
| Taxable loss | −$19,160 |
The tax effect: a $19,160 loss at a 39% marginal rate returns $7,472 at tax time.
The true position: the investor paid out $11,160 in cash and got $7,472 back — a net cost of $3,688 a year, about $71 a week, to hold a $650,000 asset.
Notice what depreciation did: it added $8,000 to the deductible loss without costing a cent of cash this year, converting part of the refund into pure cash flow. This is why depreciation schedules matter so much on newer properties — and why older, fully-depreciated properties gear much less attractively. (Depreciation isn't free money forever: claimed building depreciation reduces your cost base and increases capital gains tax later.)
Our negative gearing calculator runs this full cash flow — including your actual marginal rate and a depreciation estimate — for any combination of price, rent and rate.
The bet you are actually making
That $71 a week only makes sense if the property's value grows by more than it costs you to hold. On the example above, the property needs to appreciate by just $3,688 a year — 0.6% — for the investor to break even. Anything above that is profit, leveraged across the full $650,000 asset with only ~$130,000 of the investor's own money in it. That leverage is why the strategy has worked spectacularly in decades when Australian property compounded at 6–7%.
But run the honest version too. If the property is flat for five years, the investor has paid ~$18,500 to stand still — plus stamp duty on the way in and agent fees on the way out. Negative gearing magnifies outcomes in both directions; it does not create them. The strategy fails quietly in flat markets and fails loudly when rates rise faster than rents: at 7% interest, the same property's net cost jumps to about $105 a week.
Details that change the answer
Your marginal rate is the multiplier. The same loss returns 47% to someone earning $200,000 and 32% to someone earning $80,000. Negative gearing is structurally more valuable to higher earners — which is both its arithmetic and the core of the policy debate around it.
Interest-only vs principal-and-interest. Only the interest portion is deductible. P&I repayments cost more cash for the same deduction, which is why geared investors traditionally favour interest-only periods — accepting that the principal must be dealt with eventually.
Positive gearing isn't failure. As rents rise and the loan shrinks, most geared properties eventually turn positive — the "loss" era ends, tax becomes payable on the surplus, and the asset simply becomes an income-producing investment. Gearing negative forever isn't the goal; it's the entry cost.
The exit is taxed. When you sell, capital gains tax applies — with a 50% discount for assets held over 12 months. A $200,000 gain after discount adds $100,000 to your taxable income in the year of sale. Model the exit with the CGT calculator before you rely on the headline gain.
The bottom line
Negative gearing is a leveraged growth bet with a partial subsidy on the holding cost. Judge any specific property the boring way: work out the true net weekly cost from the table above, then ask whether you'd confidently bet that this asset, in this suburb, will out-grow that cost plus your transaction costs. The tax refund is arithmetic; the growth is the gamble.
Example uses 2026–27 resident marginal rates including the 2% Medicare levy. Depreciation figures are illustrative — get a quantity surveyor's schedule for a real property. General information, not financial or tax advice.