Negative gearing happens when your rental property costs more to own than it earns in rent. The difference between your income and your expenses is a loss, and the ATO lets you deduct that loss from your other income, typically your salary or wages, to reduce your overall tax bill.
Most Australian property investors are negatively geared, at least in the early years of ownership. It is one of the most common tax strategies for landlords in Australia, and it is perfectly legal. The idea is that the combination of tax savings and long-term capital growth makes the short-term cash loss worthwhile.
How It Works in Practice
Say your investment property earns $25,000 per year in rent, but your total costs (mortgage interest, council rates, insurance, property management fees, repairs, and depreciation) come to $35,000. You have a $10,000 loss for the year.
That $10,000 loss gets deducted from your taxable income. If you earn $90,000 from your day job, you would only be taxed on $80,000. At a marginal tax rate of 32.5 cents per dollar, that saves you $3,250 in tax.
What Costs Count?
The expenses that contribute to a negative gearing position include mortgage interest (not principal repayments), property management fees, council and water rates, insurance, repairs and maintenance, and depreciation on the building and its fixtures. Depreciation is a non-cash deduction, which means it reduces your taxable income without you actually spending money that year.
Why It Matters for Landlords
Negative gearing is not a goal in itself; nobody wants to lose money. The strategy only works if your property gains enough in value over time to more than offset the annual losses. It is important to track every deductible expense carefully so you claim the full benefit. Missing even one or two deductions can cost you hundreds of dollars each year.
propkt tracks your rental income and expenses automatically, so you always know whether your property is negatively or positively geared, and exactly how much you can claim at tax time. Use the negative gearing calculator for a quick check, or read our complete guide to negative gearing for the full picture.