What Is Negative Gearing? A Worked Example

The short answer

Negative gearing is when the costs of owning an investment property (chiefly the loan interest plus rates, insurance, repairs and management fees) add up to more than the rent it earns, producing a net rental loss. In Australia that loss can generally be deducted against your other income, like salary, reducing your tax bill. The investor still loses cash each year on the property, but hopes the future capital gain more than covers those losses.

How negative gearing works in Australia

"Gearing" just means borrowing to invest. A property is:

• Positively geared when rent exceeds the deductible costs (you make a taxable profit), or
• Negatively geared when deductible costs exceed rent (you make a net rental loss).

Under current rules, the ATO lets you claim rental expenses against your rental and other income such as salary or wages, so a net rental loss lowers your overall taxable income. See How to claim rental expenses and Moneysmart's negative gearing explainer.

Expenses that are typically immediately deductible include loan interest, council and water rates, landlord insurance, property management fees, repairs and maintenance, strata/body corporate fees, and land tax. Some costs (capital works, depreciation, borrowing costs) are claimed over multiple years instead.

The tax benefit isn't a refund of the whole loss. It's the loss multiplied by your marginal tax rate. For 2025-26 the resident rates are 16% from $18,201, 30% from $45,001, 37% from $135,001 and 45% above $190,000, plus the 2% Medicare levy (ATO tax rates).

Top marginal bracket	Rate + Medicare	Tax saved on a $10,000 loss
$45,001–$135,000	32%	$3,200
$135,001–$190,000	39%	$3,900
Over $190,000	47%	$4,700

Change ahead: the 2026-27 Federal Budget proposes that from 1 July 2027, only newly built properties (and established properties acquired before 13 May 2026) can be negatively geared against other income (Budget factsheet). Existing arrangements before that date are grandfathered. Rules can change, so always check the current ATO position.

A worked example (checkable maths)

Say you buy a $600,000 investment unit with a 90% loan ($540,000) at 6% interest, interest-only (common for investors so the full repayment is deductible interest).

Annual interest: $540,000 × 6% = $32,400 (interest-only, so principal isn't repaid).

Other deductible costs (estimates):

Item	Annual
Loan interest	$32,400
Council + water rates	$2,200
Landlord insurance	$1,400
Strata fees	$3,500
Property management (~7% of rent)	$1,820
Repairs/maintenance	$1,200
Total deductible costs	$42,520

Rent: $500/week × 52 = $26,000 a year.

Net rental loss: $26,000 − $42,520 = −$16,520.

Now the tax effect. If your salary puts your top dollar in the 37% bracket (effective 39% with Medicare):

Tax saved: $16,520 × 39% = $6,442.80.

So the property costs you $16,520 before tax, but the deduction hands back about $6,443, leaving an out-of-pocket cost of about $10,077 a year (~$194/week). The strategy only pays off if the property's capital growth over time exceeds those accumulated after-tax losses, which is never guaranteed.

If you'd borrowed 80% ($480,000) instead, interest would be $28,800 and you'd also dodge LMI: at 90% LVR on a comparable loan, LMI adds a one-off premium (roughly $9,600 on a $480k→$540k step-up). A bigger deposit means a smaller loss and less tax saved, but more cash in your pocket.

Model the loan side in True Loan

True Loan doesn't calculate income tax, but it does nail the biggest input to a gearing calculation, the interest you'll actually pay, along with your equity/LVR over time.

1. Open True Loan and set Property value $600,000, Loan $540,000 (90% LVR), Rate 6%, Term 30 years.
2. Switch the repayment type to Interest-only to see the pure annual interest figure that drives the deduction; toggle back to Principal & interest to compare.
3. Add ongoing costs (council rates, water, insurance, strata, land tax, property management) so your total holding cost matches the example above.
4. Use the timeline to watch projected value, equity and LVR grow under your chosen growth-rate assumption, which is the capital-gain side of the bet.
5. Want to test paying it down faster? Use the dedicated Extra repayment ($/month) input, or model a sustained Offset balance separately. They're two different inputs.

Compare an 80% vs a 90% deposit side-by-side at trueloan.app/compare. For the equity needed to fund a deposit, see how much equity to buy a second investment property.

Common questions and mistakes

• "Negative gearing makes the property free." It doesn't; you still spend real cash every year. The tax office only refunds the loss × your marginal rate, never 100%.
• "P&I repayments are fully deductible." Only the interest portion is deductible, not the principal. That's why investors often use interest-only loans; see interest-only vs P&I.
• "Land tax doesn't apply to me." Investment properties usually attract land tax, which varies by state and is itself deductible.
• "My loss disappears if my income is too low." If other income can't absorb the loss, it can generally be carried forward to a future year.
• Capital gains tax: when you sell, CGT applies to the gain (with a possible 50% discount after 12 months). Negative gearing reduces income tax along the way, not CGT.

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Figures here are estimates for general information only and depend on your personal circumstances; they are not financial, tax or credit advice. Tax rules change; confirm with the ATO, Moneysmart and a registered tax agent before acting.