How Negative Gearing Works and Why Investors Use It

What Is Negative Gearing?

At its core, negative gearing is a situation in which the costs of owning and maintaining an investment property exceed the rental income it generates. The “negative” in negative gearing is the net loss that occurs when expenses (such as loan interest, maintenance, and property management fees) exceed rent income.

According to the Australian Tax Office, approximately 80% of Australians using negative gearing do so for property investments, while a smaller portion applies it to shares and other assets. The real benefit comes when investors use these losses to reduce their taxable income, potentially saving them a significant amount of money in taxes.

To better understand the expenses associated with a negatively geared property, let's review the typical cost breakdown.

As shown, loan interest typically accounts for the largest share of expenses, followed by maintenance and other costs, underscoring the financial commitment associated with negative gearing.

At Stryve Finance, we can help you evaluate whether negative gearing is right for you based on your investment strategy and financial situation. If you're unsure, our team of expert mortgage brokers can assess your current property investment options and guide you through the process.

How Does Negative Gearing Work in Australia?

Negative gearing allows investors to offset the costs of owning an investment property against their taxable income. For many investors, this can be a valuable strategy to reduce their annual tax bill, especially when property values are expected to rise over time.

Here's a breakdown of how negative gearing works in Australia:

1. You purchase a property using a loan (or mortgage) from a bank or lender. This property could be residential or commercial.
2. Rental income from the property doesn't cover all of the ongoing expenses. These expenses can include loan interest, property management fees, maintenance costs, insurance, and council rates.
3. The resulting loss between the income and expenses is then deducted from your taxable income, which means you will pay less tax.
   
   Example: If you earn a salary of $100,000 and make a $10,000 loss from your investment property, your taxable income will be reduced to $90,000 for tax purposes.
4. Long-term capital gain is often expected. Investors typically expect that, despite short-term losses, the property's value will appreciate over time, resulting in a capital gain upon sale.

In fact, around 65% of negative gearing claims are made by individuals in the top 20% of income earners, highlighting its popularity among higher-income Australians looking to reduce their taxable income.

At Stryve Finance, we work closely with investors to identify the best mortgage solutions and tax strategies. Whether you're just starting with your investment property or looking to expand your portfolio, our team of experts is here to help you understand the nuances of negative gearing and guide you toward making wise financial decisions.

Why Do Investors Use Negative Gearing?

Investors are drawn to negative gearing for several reasons, primarily because it can reduce their taxable income and offer the potential for significant long-term financial gains. Here's why many investors, especially in the Australian property market, choose to use negative gearing as part of their investment strategy:

1. Tax Deduction

One of the primary reasons for using negative gearing is the ability to claim a tax deduction. If you're negatively geared, the net loss from your property (i.e., when your expenses exceed your rental income) can be deducted from your overall taxable income. This results in a lower tax bill for the year.

For example, if you earn $100,000 annually and incur a $10,000 loss from your investment property, your taxable income will be effectively reduced to $90,000, resulting in significant tax savings.

2. Capital Growth

Recent research shows that the average annual growth rate for Australian property has been around 7% per year over the past 30 years, making long-term capital gains a key factor in why investors accept short-term losses. In the Australian property market, investors often use negative gearing, expecting property values to increase over time, which potentially leads to significant capital gains upon sale.

The logic is simple: although investors may incur annual holding costs, the expectation is that the eventual sale will generate a profit that more than offsets those losses.

3. Leverage Strategy

Negative gearing is also a form of financial leverage. With negative gearing, investors can borrow more to buy larger properties than they might otherwise be able to afford. By using borrowed funds to invest, investors hope the property's value will grow faster than it would with their own savings.

While leverage can amplify returns, it also carries risks, especially if property values stagnate or decline. Nonetheless, many Australian investors use negative gearing to take advantage of the potential for higher returns while paying less tax in the short term.

Now, let's explore the main reasons why investors choose to use negative gearing as part of their investment strategy.

As shown, tax deductions and capital growth are the primary drivers of negative gearing, with leverage playing a smaller but still significant role.

Case Study

To fully understand how negative gearing works, let's walk through a real-world example. This will help you see the financial impact and the tax benefits in action.

Scenario:

• Property purchase price: $500,000
• Loan amount: $400,000
• Interest rate: 4%
• Rental income: $20,000 per year
• Property expenses: $28,000 per year (includes loan interest, maintenance, insurance, rates, and property management fees)

Breakdown of Costs:

• Annual loan interest: $400,000 x 4% = $16,000
• Other expenses (maintenance, insurance, property management, etc.): $12,000

Total Expenses: $16,000 (loan interest) + $12,000 (other expenses) = $28,000

Net Loss: $28,000 (expenses) - $20,000 (rental income) = $8,000

In this example, the investor experiences a net loss of $8,000 per year. However, this loss can be deducted from the investor's taxable income, reducing their overall tax liability.

For example, if the investor's salary is $100,000, the $8,000 loss from the investment property reduces their taxable income to $92,000. This means the investor will pay less tax for the year due to the deduction.

While the investor is losing money on paper in the short term, they may expect the property's value to increase over time. If the property appreciates, they could make a significant capital gain when they sell, which could offset the annual losses experienced from negative gearing.

Key Takeaway:

Negative gearing is often used with the expectation that the capital gains from property appreciation will provide a significant return on investment in the future.

Negative Gearing vs Positive Gearing vs Neutral Gearing

Understanding the difference between negative gearing, positive gearing, and neutral gearing is crucial when making decisions about your investment property strategy. Let's break down these three common types of gearing and how each one works:

When Each is Used:

1. Negative Gearing:
   • Investors use negative gearing when they are willing to accept a loss in the short term to receive a tax deduction and, hopefully, capital growth in the long term. Investors often focus on long-term wealth building and capital gains.
   • It's typically used in a low-interest-rate environment, where investors can afford the annual losses while waiting for the property's value to rise.
2. Positive Gearing:
   • Positive gearing occurs when the rental income exceeds the costs of owning the property, resulting in a taxable profit. This strategy is typically used by investors seeking immediate cash flow or who already have substantial equity in the property.
   • While positive gearing doesn't provide the same immediate tax benefits as negative gearing, it does offer steady rental income, which can benefit some investors.
3. Neutral Gearing:
   • Neutral gearing occurs when income and expenses balance. There is no tax benefit, and there is no gain or loss.
   • This is more common in property markets where rental income and expenses are relatively balanced, and the investor isn't looking for either short-term losses or immediate profits.

Which Gearing Strategy Should You Choose?

• If you're comfortable with the long-term investment plan and you expect property values to increase, negative gearing may be the right option.
• If you're looking for immediate cash flow and don't want to experience ongoing losses, positive gearing might be a better strategy.
• If you don't want the risk of either loss or profit, neutral gearing could suit you, but it's relatively rare as a strategy.

We work with you to structure your loans and help make informed decisions about how best to leverage your investment properties.

Tax Deductions Allowed Under Negative Gearing

One of the main benefits of negative gearing is that you can claim tax deductions for various costs related to owning and managing an investment property. These deductions help reduce your taxable income, making negative gearing a more attractive strategy for property investors.

Here are some of the key expenses you can deduct:

1. Loan Interest: The interest you pay on your mortgage for the investment property is a tax-deductible expense.

2. Property Management Fees: If you hire a property manager, their fees are also deductible. This includes costs for managing tenants and property upkeep.

3. Repairs and Maintenance: You can claim the cost of repairs (like fixing leaks or repainting), but improvements (like renovations) need to be depreciated over time.

4. Council Rates: Council rates, or local government taxes, are another deductible expense for your property.

5. Insurance: Insurance costs, like landlord insurance or building insurance, are deductible.

6. Depreciation: You can claim depreciation on the property's fixtures and fittings (e.g., appliances, carpets) over time.

7. Other Expenses: Other costs like advertising for tenants, legal fees, and accounting fees can also be deducted.

By taking advantage of these tax deductions, property investors can reduce their taxable income and lower their overall tax liability. Understanding and correctly applying these deductions is essential for maximising the benefits of negative gearing. Always keep detailed records of your property-related expenses to ensure you're making the most of the available tax benefits.

Is Negative Gearing Right for You?

Deciding if negative gearing is right for you depends on your financial situation and goals. While it offers tax benefits and potential for long-term gains, it also comes with risks. Here's a simple breakdown to help you determine whether it's a good fit.

1. Can You Handle Short-Term Losses?

Negative gearing means you'll be making a loss each year because your rental income won't cover all the property costs (like loan interest, maintenance, etc.). You'll need to be comfortable with this loss, at least until your property's value increases.

2. Are You in It for the Long Term?

On average, Australian property investors hold onto their investment properties for about 8-10 years, with most relying on long-term capital gains to offset the annual losses from negative gearing. You're betting on capital growth, the idea that property prices will rise over time, giving you a profit when you sell. If you're looking for quick profits, this may not be the right strategy.

3. Are You Comfortable with Risk?

There's a risk with negative gearing: if the property doesn't appreciate or costs increase (such as interest rates or maintenance), you could end up losing money. You need to be comfortable taking on this risk.

4. Do You Want Tax Relief?

If you're looking to reduce your tax bill, negative gearing can help. The loss from your property can reduce your taxable income, meaning you pay less tax. However, remember that the strategy doesn't guarantee profits.

5. Are You in a High-Income Bracket?

People with higher incomes benefit more from negative gearing because the tax savings are more significant. If you're in a lower income bracket, the tax benefits might not be as helpful, and other investment strategies could work better for you.

FAQs About Negative Gearing

To wrap up, let's answer some of the most frequently asked questions (FAQs) about negative gearing. These questions will help clarify any remaining doubts you may have about how the strategy works and whether it's right for you.

1. What Does Negatively Geared Mean?

A negatively geared property means that the income generated from the property (usually from rent) is less than the expenses required to maintain the property (including loan interest, rates, insurance, maintenance, and property management fees). The result is a tax-deductible loss, which can reduce your taxable income and, therefore, your tax bill.

2. Can I Negatively Gear a Property I Live In?

No, negative gearing only applies to investment properties. The property must be generating income (such as rental income) to be eligible for negative gearing. A property you live in cannot be negatively geared, as it doesn't generate revenue for tax purposes.

3. Is Negative Gearing Still Legal in 2026?

Yes, negative gearing remains legal in Australia as of 2026. However, it has been a topic of political debate for many years, with occasional proposals to limit or modify the benefits of negative gearing. Always stay informed about potential changes to tax laws that could affect this strategy.

4. How Much Can I Claim on a Negatively Geared Property?

According to the ATO, the average Australian property investor claims about $20,000 per year in deductions, with loan interest being the largest category, often making up over 60% of the total claimed expenses. Standard deductions include loan interest, property management fees, maintenance and repairs, insurance, council rates, and depreciation. The more expenses you can claim, the higher your tax deduction. However, it's crucial to maintain detailed records and consult a tax professional to ensure you're claiming everything correctly.

5. How Long Does It Take to Make a Profit with Negative Gearing?

The time it takes to see a return on a negatively geared property depends on several factors, including the property market's growth, interest rates, and the property's management. Generally, negative gearing is a long-term investment strategy. It may take several years for the property to appreciate enough to cover the short-term losses and generate a profit upon sale. The goal is to profit from the sale of the property, assuming capital growth has occurred.

6. Can Negative Gearing Be Used on Shares?

Yes, negative gearing can be applied to investments other than property, such as shares or managed funds. If you borrow money to invest in shares and the income from those shares (such as dividends) doesn't cover the cost of the loan (including interest), you may be able to negatively gear your share investment and claim the losses against your taxable income.

7. What Happens If Property Prices Don't Go Up?

One of the risks of negative gearing is that if property prices don't increase, or if they decrease, the capital gain you were hoping for may not materialise. In such cases, the ongoing losses from negative gearing could outweigh any potential tax savings or benefits. It's important to thoroughly research the market and understand the risks involved before committing to negative gearing.

How Stryve Finance Can Help You Make Informed Decisions

At Stryve Finance, we understand that negative gearing can be a powerful strategy for property investors, but it's not the right fit for everyone. Our team of expert mortgage brokers can help you assess your current financial situation, determine whether negative gearing is a good fit, and guide you through every step of the process.

We can also help you structure your investment property loan in the most tax-efficient way and ensure you're fully informed about all of your options.