What is Negative Gearing?
Negative gearing occurs when your investment property's expenses (mortgage interest, rates, insurance, maintenance) exceed its rental income — creating a "loss" that reduces your taxable income.
Simple example:
- Property purchase: $700,000 (80% LVR, interest-only at 6.5%)
- Annual mortgage interest: $36,400
- Annual holding costs (rates, insurance, water): $6,150
- Annual rental income ($550/week): $28,600
- Annual shortfall: $13,950
At a 45% marginal tax rate ($150K+ salary), you claim this $13,950 loss against your income:
- Tax refund: $13,950 × 45% = $6,278 back from the ATO
- Actual out-of-pocket: $13,950 - $6,278 = $7,672/year ($147/week)
Meanwhile, if the property grows at 8% annually: $700K × 8% = $56,000 capital gain — far exceeding your $7,672 cost.
Who Should Use Negative Gearing?
Negative gearing works best for:
- High-income earners ($150K+): Higher tax bracket = larger refund percentage
- Growth-focused investors: You're paying a small annual cost for large capital appreciation
- Land-rich properties: Land appreciates at 8–10%/year while buildings depreciate at 2.5–3%/year
It is NOT suitable for:
- Low-income earners (tax refund too small to justify the shortfall)
- Cash-flow-dependent investors (retirees, self-funded retirees)
- SMSF investors (super funds are taxed at 15%, so the benefit is minimal)
Our team typically recommends negative gearing for clients earning $150K+ with the capacity to absorb $5,000–$10,000/year in holding costs while building long-term wealth through land appreciation.
What Expenses Can You Deduct?
100% deductible in the current year:
- Mortgage interest (interest-only loans are 100% deductible)
- Land tax (~$2,000/year)
- Council rates (~$2,000/year)
- Water/service charges (~$650/year)
- Building & landlord insurance (~$2,100–$2,900/year)
- Property management fees (4.90–8.90% + GST)
- Maintenance and repair costs (case-by-case assessment)
NOT deductible in the current year (added to cost base for CGT):
- Buyer's agent fee ($15,800 + GST)
- Stamp duty (~5.5% of purchase price)
- Loan principal repayments
- Capital improvements (renovations that add value, not just maintain)
Depreciation (non-cash deduction):
- Building component: 2.5% per year of construction cost
- A $110K granny flat generates ~$2,750/year in depreciation deductions
- At 37% marginal rate, that's ~$1,000/year tax benefit without spending a cent