How Negative Gearing Works

You lose $10,000 on a rental property this year, and the tax office hands back $3,200. That, in one sentence, is negative gearing.

When a rental costs more to run than it earns in rent, you subtract that loss from your other income — like your salary — and pay less tax. The tax office is splitting your losses with you, not covering them: you still lose money every year. The refund just softens the blow while you wait for the property to grow in value.

Gearing just means borrowing money to invest. Take out a loan to buy a rental and you're geared.

Positively geared: the rent covers everything and you pocket the difference, paying tax on the profit.

Negatively geared: the rent doesn't cover your costs — usually because of loan interest — and Australia's tax rules let you take that loss off your other income.

Priya earns a $100,000 salary and owns a rental. Her year in five lines:

Priya's $10,000 loss comes straight off her salary, so she's taxed on $90,000 instead of $100,000.

At her income, every dollar between $45,001 and $135,000 is taxed at 30%, plus the 2% Medicare levy — the extra slice most of us pay towards public healthcare. That's 32 cents per dollar, and it's her marginal rate: the tax rate on her top, highest-taxed dollar. Cutting her taxable income (the income the ATO actually taxes) by $10,000 saves about $3,200 in tax.

So: $10,000 out, $3,200 back, real cost around $6,800. Negative gearing is a discount on losing money, not a way to avoid it — it only wins if the property's value grows by more than all the losses along the way.

The higher your income, the more each dollar of loss is worth back. Someone on $150,000 sits in the 37% bracket, so with the Medicare levy their $10,000 loss returns about $3,900. Someone on $40,000 gets back only 16 to 18 cents per dollar. That's why negative gearing skews towards higher earners.

Don't overlook depreciation — claiming the slow wearing-out of the building and its fittings as a yearly expense. It's a paper deduction: a cost you subtract from your income before tax is worked out, without any cash leaving your pocket. It can nudge a break-even property into a tax loss. More on that in our rental income guide.

You're betting that capital growth — the property rising in value — eventually outruns years of real cash losses. If the property doesn't grow, no stack of refunds will rescue the maths.

Interest rate rises make the losses bigger. Bigger refunds too — but you fund the hole in your budget every month, and the refund arrives once a year.

And when you sell at a profit, capital gains tax — the tax on that profit — applies. Run your numbers before you buy, not after.