Let's check out how negative gearing can turn out to be a positive thing for you.
If you’ve ever heard your mates, work friends or politicians on TV talk about ‘negative gearing’ and you had no idea what it meant but just nodded along, we’ve got you!
Negative gearing might make you think of gears, tools and mechanic-y things, but it’s actually referring to ✨investment properties✨
Yup. ‘Gearing’ means borrowing money to invest. This could be in a company or for a personal investment.
When you take out a loan to buy an investment, like a rental property, shares, or even a business, that’s called a geared investment.
Ok… so where does the ‘negative’ come in?
In the case of property investments, negative gearing is when the cost of owning the property is higher than the income that the investment property earns. These costs include interest on mortgage repayments, property management fees, landlord insurance, repair costs, etc.
And this sounds bad, right? So why would anyone choose to negatively gear a property?
Because the government lets you claim the loss as a tax deduction against your other income (like your salary).
So even though you’re making a loss on the property right now, you can reduce your taxable income… and therefore, pay less tax today.
This strategy is often used by investors who are hoping that the property will grow in value over time.
For example, Australia’s property market has been in a strong period of growth. In fact, it’s expected to rise up to 12% in FY26 in some major cities. The idea is: take the short-term loss, claim a tax benefit now, and (hopefully) sell the property down the track for a capital gain.
Let’s look at an example:
Can’t remember what assessable income is? We’ve got you covered in the Tax Academy.
So even though Jess is making a loss on the property for now, she’s getting tax deductions on her overall taxable income.
And she’s hoping that the capital growth on her property over time will eventually outweigh the costs she’s bearing at the moment.
Sounds complicated? It is a little bit. But this is a VERY popular strategy used by Australian property investors. In fact, more than half of all property investors are negatively gearing their property.
But here are some things you should know…
1. Cash flow be tight
If the rental income isn’t enough to cover all expenses, an investor needs to have excess cash on hand to fund the difference, especially in the earlier years of owning the property.
This can be extra tough in times when interest rates are higher, and investors are shelling out more cash to maintain their property.
Suddenly you could find yourself saying goodbye to those iced-matcha lattes and concert tickets because property maintenance costs are just too high.
2. Capital gains aren’t guaranteed
A lot of this strategy relies on the fact that the property value will go up over time, but like any investment, those gains aren’t guaranteed.
To give some context, Australia’s property prices have climbed 39% on average in the past 5 years, and with the RBA cautiously cutting cash rates this year, property experts are predicting further increases in home values in 2025.
That being said, investors will always need to expect the unexpected and be prepared to shoulder the risk of property prices falling if the economy slows down.
3. Not the best for housing affordability
As great as negative gearing is, not everyone is a fan…and that’s because negative gearing has the potential to worsen housing affordability.
The allure of those tax benefits can drive up demand for investment properties, which increases competition in the market and pushes prices up.
And that means it’s more challenging for first-home buyers and lower-income individuals to enter the market.
What do you think?
Is negative gearing just a tax-effective way to invest in property? Or is it keeping you out of the housing market?
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