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Negative gearing explained

Negative gearing is a tax term, but it’s really a cashflow concept: your investment costs more to run than it earns. The tax benefit can help, but it does not turn a bad investment into a good one.

What is negative gearing?

In plain English: your deductible expenses exceed your investment income, creating a net loss.

Simple example

  • Rent/Investment income for the year: $30,000
  • Deductible expenses (interest, agent fees, insurance, rates, etc.): $42,000
  • Net result: $12,000 loss

That loss may be able to reduce your taxable income (subject to the rules and your circumstances).

Key point

Tell it like it is: negative gearing usually means you are out of pocket during the year. The tax refund only covers a portion of the loss.

A typical goal is long-term wealth building (capital growth) while managing the short-term cashflow impact.

What negative gearing is not
Negative gearing is not a “free refund”. It is not an automatic strategy that suits everyone. And it is not something you want to do by accident. If your rental is negatively geared due to unexpected vacancies or higher interest rates, that’s not strategic — that’s a red flag.

Why it matters

Done properly, it can improve tax accuracy and planning. Done poorly, it can create cashflow stress and ATO risk.

Tax planning

Understanding the expected taxable loss helps you plan cashflow and avoid surprises when the tax return is done.

Cashflow reality

A refund (if any) arrives later. The mortgage and expenses are paid now. Budgeting is non-negotiable.

Decision quality

Separating “tax outcome” from “investment outcome” helps you make better decisions and avoid buying for the wrong reasons.

Common pitfalls (and what to do instead)

Most negative gearing problems are preventable with the right habits and expectations.

Pitfalls we see often

  • Buying for the tax benefit and ignoring the investment fundamentals (rent demand, vacancy risk, ongoing costs).
  • Overestimating rent and underestimating interest rates, insurance, body corporate, repairs, and vacancy.
  • Claiming expenses that should be capital (improvements) as immediate deductions (repairs vs improvements is a big one).
  • Poor records: missing invoices, missing loan statements, unclear private use (if any).
  • Incorrect apportionment where the property is partly private use or not genuinely available for rent.

Best practice approach

  • Run a conservative cashflow forecast: lower rent, higher interest, and a vacancy buffer.
  • Keep a clean “rental folder”: loan statements, agent statements, invoices, insurance and rates notices.
  • Classify spend correctly: repairs vs capital improvements — ask before you lodge.
  • Review annually: interest rate changes, rent changes, and whether the strategy still fits.
  • Use a depreciation schedule where appropriate (and update it after major works).
The tax office is not interested in “close enough” numbers for rentals. If records are weak, claims are harder to defend.

Best-practice checklists

If you want negative gearing to work as intended, this is what “good” looks like.

Before you buy (sanity check)

During the year (compliance + control)

Important note about depreciation and CGT later
Depreciation and capital works deductions can be valuable each year, but they can affect capital gains tax later. In simple terms: depreciation/capital works claimed over time can reduce the property’s cost base for CGT purposes, which can increase the capital gain when you sell. It’s still often worth claiming — just be aware of the long-term trade-off.

Case studies (good and bad)

Same concept. Completely different outcomes depending on expectations and discipline.
Best practiceGood case study: “Planned loss, manageable cashflow”

A taxpayer on a higher income buys a well-located investment property with conservative numbers: realistic rent, an interest-rate buffer, and a vacancy buffer. They keep clean records, use a property manager, and review the position annually.

The property runs at a known, manageable loss in the early years. The tax effect helps, but the decision is driven by fundamentals and long-term holding intentions.

Outcome: fewer surprises, solid compliance, and a strategy that is sustainable.

Avoid thisBad case study: “Bought for the refund”

An investor buys based on a headline “tax benefit”, assumes constant rent and low interest rates, and doesn’t budget for vacancies or repairs. They keep poor records and claim improvements as repairs.

When interest rates rise and the property is vacant for longer than expected, cashflow becomes tight. The “refund” is nowhere near enough to fix the core issue.

Outcome: stress, higher risk of incorrect deductions, and sometimes forced sale at the wrong time.

If you’re considering buying an investment purely for tax, pause. We can sanity-check the tax side, but the investment decision should stand on its own merits. For investment advice, you may also need a licensed financial adviser.

Official Australian resources

If you want the source guidance, these are good starting points.

General information only. This page is not legal or financial advice and does not consider your specific circumstances.

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