Negative gearing is one of the most widely used investment strategies in Australia, with over 2 million property investors claiming deductions each year. Yet it remains one of the most misunderstood concepts in property finance. At Mortgage & Finance Advisory, we help investors across Geelong, the Surf Coast, Melbourne, and regional Victoria structure their investment finance to maximise tax benefits while building long-term wealth.
This guide explains exactly how negative gearing works, the tax benefits available, common mistakes to avoid, and how to structure your investment property finance for the best outcome.
Negative gearing simply means that the total costs of owning your investment property are greater than the rental income it produces in a given financial year. The “gearing” refers to borrowing money to invest, and “negative” means the investment is producing a loss before tax benefits are considered.
For example, if your investment property earns $25,000 per year in rent but costs $35,000 per year in mortgage interest, council rates, insurance, management fees, maintenance, and depreciation, you have a net loss of $10,000. Under Australian tax law, this $10,000 loss can be deducted from your other taxable income (such as your salary or business income), reducing the amount of tax you pay.
The tax saving depends on your marginal tax rate. If you’re earning between $120,001 and $180,000, your marginal rate is 37% (plus 2% Medicare levy). A $10,000 property loss would save you $3,900 in tax ($10,000 x 39%). If you’re in the top bracket (above $180,000 at 45%), the same loss saves $4,700.
Negatively geared: Your property costs exceed your rental income, creating a tax-deductible loss. You’re effectively subsidising the holding costs out of your own pocket, banking on capital growth to deliver the overall return. This strategy works best for higher-income earners who benefit most from the tax deductions.
Positively geared: Your rental income exceeds all property costs, putting money in your pocket each month. While this sounds ideal, the rental surplus is added to your taxable income, increasing your tax bill. Positively geared properties are more common in regional areas where purchase prices are lower relative to rents.
Neutrally geared: Income and expenses are roughly equal, creating neither a loss nor a surplus. Some investors aim for neutral gearing as a balance between cash flow and tax benefits, particularly as their property moves from negative to positive gearing over time due to rising rents.
The deductions available to investment property owners are extensive. Understanding what you can claim is essential to accurately calculating your gearing position. Deductible expenses include mortgage interest (the largest deduction for most investors), council and water rates, landlord insurance, property management fees (typically 5 to 8% of rental income plus GST), repairs and maintenance, body corporate fees for units and apartments, land tax, pest control, gardening and lawn mowing, advertising for tenants, legal fees related to tenancy matters, and travel costs for property inspections (subject to current ATO rules).
Capital expenses (costs that improve the property rather than maintain it) are not immediately deductible. Instead, they are depreciated over their effective life. This includes new kitchen or bathroom renovations, structural improvements, adding a deck or pergola, and installing air conditioning or solar panels. These costs are claimed over time through the capital works deduction (Division 43), typically at 2.5% per year for structural improvements.
Depreciation is one of the most powerful tax tools available to an investor because it’s a non-cash deduction. You don’t actually spend money to claim it. You’re claiming the declining value of the building structure and its fixtures and fittings over time. There are two types of depreciation available to property investors.
Division 43 (Capital Works): This covers the building structure itself and any structural improvements. For residential properties built after September 1987, you can claim 2.5% of the original construction cost per year for 40 years. On a property with a construction cost of $300,000, that’s $7,500 per year in deductions without spending a cent.
Division 40 (Plant and Equipment): This covers removable items like carpet, blinds, hot water systems, air conditioning units, dishwashers, and other fixtures. Each item is depreciated over its effective life as determined by the ATO. Note that since 2017, Division 40 deductions for second-hand assets in residential properties are only available to the original purchaser of the item. If you buy an established property, you can only claim Division 40 depreciation on new items you install yourself.
A professional quantity surveyor can prepare a depreciation schedule for your property, identifying all claimable items and calculating the deductions available over the next 40 years. The cost of the schedule (typically $600 to $800) is also tax-deductible and usually pays for itself many times over through the deductions it uncovers.
An investor purchased a 5-year-old townhouse in Belmont for $520,000 as an investment property. The annual rental income was $24,960 ($480/week). Cash expenses including interest, rates, insurance, and management totalled $31,200, creating a cash loss of $6,240. However, a depreciation schedule identified $8,400 in first-year depreciation deductions (building and plant combined). The total tax loss was $14,640. At the investor’s 37% marginal tax rate (plus 2% Medicare levy), this generated a tax refund of $5,709. The actual out-of-pocket cost of holding the property was just $531 per year ($6,240 cash loss minus $5,709 tax refund), while the property had the potential to grow in value over the long term.
How you structure your investment property finance has a direct impact on your tax position. The key rule is to maximise deductible debt (your investment loan) and minimise non-deductible debt (your home loan). Interest on an investment property loan is tax-deductible because the borrowed funds were used to produce assessable income (rent). Interest on your home loan is not deductible because your home doesn’t generate income.
This principle drives several important structuring decisions. First, don’t use your investment loan’s offset account to park personal savings. If you have an offset account linked to your investment loan, any money in that account reduces the interest charged, and therefore reduces your tax deduction. Instead, keep your savings in the offset account linked to your home loan (which isn’t deductible anyway) to reduce your non-deductible interest.
Second, keep your investment loan as interest-only rather than principal and interest, at least initially. Interest-only repayments are fully deductible, and paying principal reduces your deductible debt. Instead of reducing the investment loan, direct any surplus cash toward your home loan. This strategy (maintaining maximum investment debt while paying down non-deductible debt) is one of the most effective ways to optimise your overall tax position.
Third, never cross-collateralise your investment property and your home. Keep them as separate loans with separate lenders if possible. Cross-collateralisation (where both properties secure both loans) can create complications if you sell one property and may limit your flexibility to restructure your finance in the future.
Negative gearing is not a guaranteed path to wealth. It’s a strategy that depends on capital growth to deliver a positive overall return. If your property doesn’t grow in value (or worse, falls in value), you’re simply losing money each year with a partial tax offset. A $10,000 annual loss with a $3,900 tax benefit still means you’re $6,100 out of pocket. Over 10 years without capital growth, that’s $61,000 in real losses.
Negative gearing may not suit you if your income is relatively low (below $45,000), where the tax benefit from deductions is minimal. It also may not be ideal if you can’t comfortably afford the ongoing cash shortfall, if you’re buying in an area with limited capital growth prospects, if you’re approaching retirement and shifting to a lower tax bracket, or if the property is unlikely to become positively geared within your investment timeframe.
Tax benefits should never drive the investment decision. The primary reason to buy an investment property should be the expected total return (rental yield plus capital growth), not just the tax benefits. A property that costs you $5,000 per year after tax but grows by $30,000 to $50,000 per year is a good investment. A property that saves you $3,000 in tax but doesn’t grow in value is simply a tax-efficient way to lose money.
When you eventually sell your investment property, any profit (the difference between your sale price and your cost base) is subject to Capital Gains Tax (CGT). However, if you’ve held the property for more than 12 months, you receive a 50% CGT discount: only half the gain is added to your taxable income. This discount is a major reason why property is such a popular investment vehicle in Australia.
Your cost base includes the original purchase price, stamp duty, legal and conveyancing fees, building and pest inspection costs, and any capital improvements you’ve made to the property. It also includes agent’s selling commission and marketing costs when you sell. The higher your cost base, the lower your capital gain and the less CGT you pay.
It’s important to note that depreciation deductions reduce your cost base. If you’ve claimed $50,000 in building depreciation over the holding period, your cost base is reduced by $50,000, increasing your capital gain on sale. This means you’re not getting the depreciation deduction for free. You’re effectively deferring tax from today (when you claim the deduction at your marginal rate) to the future (when you pay CGT at half your marginal rate, thanks to the 50% discount). The net benefit depends on your marginal tax rate at each point.
Negative gearing has been a contested political issue in Australia for decades. Understanding the policy landscape helps investors assess the long-term viability of this strategy.
In 1985, the Hawke government briefly abolished negative gearing. The result was a sharp decline in rental property investment, leading to rental shortages and significant rent increases in Sydney and Perth. The policy was reversed in 1987, and negative gearing has remained in place ever since.
During the 2019 federal election, the opposition proposed limiting negative gearing to new properties only and halving the capital gains tax discount from 50% to 25%. The policy was ultimately rejected by voters, reinforcing the political difficulty of changing these tax benefits.
The current government has maintained negative gearing as-is, though housing affordability remains a key policy concern. Most tax experts believe that while minor adjustments are possible in future budgets, a complete abolition of negative gearing is unlikely given the political consequences demonstrated in 1985 and 2019.
Pro Tip: While negative gearing policy is unlikely to change dramatically overnight, investors should always ensure their property investment makes sense even without tax benefits. The best investments are those that would still be viable if negative gearing were reduced or limited.
While negative gearing can be a powerful wealth-building tool, many investors fall into traps that reduce or eliminate its benefits. Here are the most common mistakes we see:
1. Chasing tax deductions over capital growth. Some investors buy properties purely for the tax refund without considering whether the property will appreciate in value. A $10,000 tax refund means nothing if your property drops $50,000 in value. Always prioritise properties in areas with strong capital growth fundamentals: population growth, infrastructure investment, employment opportunities, and limited land supply.
2. Not getting a proper depreciation schedule. A quantity surveyor’s depreciation report typically costs $600-$800 but can identify $5,000-$15,000 in deductions in the first year alone. We regularly see investors who have owned properties for years without claiming depreciation, missing out on thousands of dollars in deductions each tax year.
3. Using the wrong loan structure. Mixing investment and personal funds, or paying down the investment loan instead of using an offset, can permanently reduce your deductible interest. Once non-deductible funds are mixed with investment borrowings, the ATO considers the entire loan tainted. Work with a broker who understands investment lending to set up the correct structure from day one.
4. Failing to review the strategy annually. Your financial situation changes over time: income increases, family circumstances shift, interest rates move. An annual review with your accountant and broker ensures your investment strategy remains optimised and your loan structure is still working effectively.
5. Overleveraging. Taking on too much investment debt relative to your income creates serious cash flow risk, especially if interest rates rise or you experience a period of vacancy. A good rule of thumb is to ensure you can comfortably service all investment loans even if rates increase by 2-3% above current levels.
Real Client Example
A Geelong couple came to us after purchasing an investment property two years earlier. They had been paying principal and interest on their investment loan while their home loan sat on interest-only. We restructured both loans, switching the investment to interest-only and redirecting the extra cash flow to pay down their non-deductible home loan faster. This single change saved them over $4,200 in tax in the first year and accelerated their home loan payoff by almost three years.
The rules are different for trusts. A trust cannot distribute a property loss to beneficiaries the way individuals can offset losses against their personal income. Property losses within a trust are trapped within the trust and can only be offset against the trust’s future income from that property or other sources. For this reason, negatively geared properties are generally better held in personal names rather than trusts, unless there are other strategic reasons for using a trust structure.
Negative gearing has been a topic of political debate for years, but as of 2026 there are no legislated changes to negative gearing rules. Any future changes would likely be prospective (affecting new purchases only) and would need to pass both houses of Parliament. It’s worth monitoring, but making investment decisions based on speculation about potential policy changes is generally not advisable.
If you rent the property to a family member at below-market rent, the ATO will only allow deductions up to the amount of rent received. You cannot claim deductions that exceed the discounted rent. The property must be rented at genuine market rates to claim the full range of deductions available to investors.
While not legally required, having a separate bank account for your investment property income and expenses is strongly recommended. It makes record-keeping significantly easier at tax time, provides a clear audit trail if the ATO queries any deductions, and helps you track the true cash flow performance of your investment throughout the year.
A negatively geared property creates a net cost that lenders factor into their serviceability calculations. The rental income helps, but the total property expenses (including the loan repayments) typically exceed the rent. Lenders assess whether you can afford this shortfall in addition to any new loan repayments. Some lenders are more generous than others in how they treat rental income shading and tax benefits, which is where a broker’s expertise in lender selection becomes valuable.
Our experienced brokers compare options across 60+ lenders to find the right solution for your situation.
Director & Senior Finance Broker
With years of experience in mortgage broking and finance, Melanie helps clients across Geelong, the Surf Coast, Melbourne and regional Victoria navigate the complexities of home loans and business finance. Contact our team on 03 9020 2699.
