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Negative gearing occurs when the costs of owning an investment property - interest, management fees, rates, insurance, depreciation - exceed the rental income it generates. In Australia, this net loss is tax-deductible against your other income, reducing your tax bill. The strategy relies on capital growth exceeding the cumulative after-tax cost of holding.
It depends on your marginal tax rate and capital growth expectations. Investors on 37%–47% marginal rates in areas with strong capital growth prospects get the most benefit - every $1 of loss reduces tax by 37–47 cents. Investors on the 32.5% rate get a smaller benefit and need stronger capital growth to compensate. Negative gearing is not a strategy based on making losses; it works when long-term capital gains outweigh the cumulative after-tax cost of holding.
Tax-deductible investment property expenses include: loan interest (the largest deduction for negatively geared investors), property management fees (7–10% of rent), council rates, water rates, landlord insurance, body corporate/strata fees, repairs and maintenance (not improvements), cleaning, garden maintenance, pest control, advertising for tenants, accounting and legal fees directly related to the property, and depreciation on the building and assets. Capital improvements (renovations, extensions) are not immediately deductible - they are added to the cost base and depreciated or claimed on eventual sale.
Depreciation allows you to claim the decline in value of the building structure (Division 43 - building allowance at 2.5% of original construction cost per year) and the assets inside it (Division 40 - plant and equipment such as appliances, carpet, blinds). A quantity surveyor prepares a depreciation schedule for a one-off cost of $500–$800. On a newer property worth $700,000, it is common to claim $8,000–$15,000 per year in depreciation - a significant non-cash deduction that improves cash flow without actual out-of-pocket cost.
Division 43 (Capital Works Deduction) covers the physical building structure - brickwork, concrete, roofing, wiring, plumbing - at a flat 2.5% per year of the original construction cost for 40 years. Division 40 (Plant and Equipment) covers removable, mechanical assets - appliances, carpet, blinds, hot water systems, air conditioners - depreciated at their effective life rate under the ATO's asset schedule. For second-hand properties purchased after May 2017, Division 40 deductions are restricted to new items you install yourself. Division 43 is unaffected by this restriction.
Negative gearing is a strategy; tax deductions are the mechanism. The net loss from your investment property (rental income minus all deductible expenses, including depreciation) becomes a tax deduction offset against your other assessable income for the year. The ATO allows this under Section 8-1 of the Income Tax Assessment Act 1997 - expenses incurred in producing assessable income are deductible.
You report all rental income and expenses at Item 21 (Rent) of your individual tax return. The net rental loss reduces your total taxable income, which reduces income tax payable. If you have Pay As You Go (PAYG) withholding from employment, you may receive a tax refund. You can also apply for a PAYG withholding variation with the ATO (form NAT 2036) to reduce the tax withheld from your salary throughout the year - improving cash flow rather than waiting for a lump-sum refund.
The ATO requires you to keep records for 5 years from when you lodge your return (or longer if they relate to the cost base of a CGT asset). Keep: all rental income receipts, expense invoices and receipts (council rates, insurance premiums, loan statements, management fees), repair invoices, depreciation schedule, and purchase and sale documents for CGT purposes. Digital records are acceptable. Property management statements are usually sufficient for income and some expense records.
Yes - negative gearing applies to any income-producing investment. If you borrow to buy shares (margin loan) and the loan interest exceeds dividends received, you can claim the net interest expense against your other income. The strategy carries greater risk than property due to higher volatility and margin call risk, but the tax treatment is identical.
A positively geared property generates more rental income than its total costs (including interest, management, rates, insurance, and depreciation). The income is assessable - you pay tax on it - but you have positive cash flow without relying on capital gains. Positive gearing suits investors who want income now rather than a future capital gain. Negative gearing suits high-income investors who can afford the shortfall and are investing in high-growth markets. Neither is inherently better: they serve different investor goals, tax positions, and risk appetites.
No. Deductions are only available for investment properties - properties you rent to arm's-length tenants on market terms. If you rent part of your home (e.g., one room via Airbnb), you can claim expenses proportional to the income-producing portion and time. You cannot negatively gear your principal place of residence.
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