Is negative gearing actually working for you?
Negative gearing can be useful — but it’s not automatically a win. A tax refund is not the same thing as a good investment. Here’s a simple way to test whether the strategy is genuinely working for you.
Start with the real question: what is it costing you after tax?
Negative gearing usually means the property runs at a loss (rental income is lower than interest and other deductible costs). That loss can reduce your taxable income and lower your tax — but you’re still paying real cash along the way.
The “working for you” test
Put aside the refund for a minute and answer these two:
- What is your out-of-pocket cost for the year? (the cash you actually pay, after rent received)
- What is the out-of-pocket cost after tax? (after the tax reduction from the rental loss)
If the property is draining cash every month and the tax benefit is only putting a small dent in it, that’s not “tax planning” — it’s a cash-flow problem with a tax label.
What usually moves the needle (and what people miss)
- Interest deductibility depends on loan purpose and structure. Mixed-purpose loans and sloppy redraw usage can create messy, risky interest claims.
- Depreciation can materially change outcomes, but it needs to be supportable and calculated properly.
- Repairs vs improvements: not every spend is immediately deductible (some is capital and claimed over time).
- Vacancy and “optimistic rent” assumptions can make a deal look better on paper than it is in reality.
When negative gearing tends to stack up
It’s more likely to be working when most of these are true:
- You can comfortably service the holding cost without relying on a future refund to cover the mortgage.
- You’ve stress-tested the numbers (rates, insurance, repairs, vacancies).
- The property and location fundamentals make sense for your time horizon.
- Your loan structure is clean and your records support the claims.
The most common mistake: buying “for the deduction”
If the main reason for buying is “it’ll reduce my tax”, it’s usually a warning sign. The deduction is a side-effect — the investment still has to stand on its fundamentals.
In a nutshell
Negative gearing can help, but it should be measured by after-tax cost and cash-flow impact — not by whether you get a refund. If you want, we can sense-check your numbers and help you understand the tax mechanics clearly.
General information only — not advice. Consider seeking financial advice before making investment decisions.
If you would like to talk through how this applies to your situation, you are welcome to book an appointment or contact us.