If you’re researching investment property in Australia, you’ve probably come across the terms “positive gearing” and “negative gearing.” These aren’t just accounting concepts, they describe two fundamentally different approaches to property investment, each with distinct benefits and trade-offs.
This guide explains both strategies, compares them, and helps you understand which might suit your financial goals.
What Is Negative Gearing?
A negatively geared property is one where your expenses exceed your rental income. You’re making a loss on paper, and that loss can be offset against your other taxable income, reducing the amount of income tax you pay.
How It Works
Your investment property expenses typically include:
- Loan repayments (specifically the interest component)
- Property management fees
- Council rates and water
- Insurance
- Repairs and maintenance
- Body corporate fees (for units)
- Depreciation on the building and fixtures
When these costs exceed your rental income, the shortfall becomes a tax deduction.
Example
You own an investment property with:
- Annual rental income: $28,000
- Annual expenses (interest, rates, insurance, management, depreciation): $38,000
- Annual loss: $10,000
If you’re on a 37% marginal tax rate, that $10,000 loss reduces your taxable income and saves you $3,700 in income tax at tax time.
But you’re still out of pocket by $6,300 for the year. The tax benefits soften the blow, they don’t eliminate it.
Why Investors Use Negative Gearing
The strategy relies on long-term capital growth. Property investors accept short-term losses because they expect the value of the property to increase significantly over time. When they eventually sell, the capital gain should more than offset the years of cash flow shortfalls.
Negative gearing is most common in high-growth markets like Sydney and Melbourne, where property prices are high relative to rental income, meaning rental yields are typically lower (2-4%).
What Is Positive Gearing?
A positively geared property is the opposite: your rental income exceeds your expenses. The property generates positive cash flow, it pays for itself with money left over.
With positively geared properties, the rent covers:
- Your home loan repayments (or at least the interest)
- All property expenses
- And leaves a surplus
That surplus is extra income, which is taxable. You’ll pay income tax on the profit, but you’re not subsidising the property out of your own pocket.
- Annual rental income: $32,000
- Annual expenses: $26,000
- Annual surplus: $6,000
That $6,000 is added to your taxable income. If you’re on a 32.5% tax rate, you’ll pay around $1,950 in additional tax, but you’ve still got $4,050 in your pocket.
Why Investors Use Positive Gearing
Positive cash flow properties are lower risk in the short term. You’re not relying on capital growth to make the investment worthwhile, the property generates returns from day one.
This approach suits investors who:
- Want the property to be self-funding
- Have lower incomes (less benefit from tax deductions)
- Are building a property portfolio and need cash flow to support borrowing power
- Are approaching retirement and want income
- Prefer lower-risk investments
Positively geared properties are more common in regional areas or outer suburbs where property prices are lower relative to rental yields.
Comparing Positive and Negative Gearing
| Factor | Negative Gearing | Positive Gearing |
|---|---|---|
| Cash flow | Negative (you top up) | Positive (surplus income) |
| Tax treatment | Loss reduces taxable income | Profit increases taxable income |
| Best for | Higher-income earners, growth focus | Income focus, lower risk tolerance |
| Typical locations | Sydney, Melbourne inner suburbs | Regional areas, outer suburbs |
| Rental yield | Lower (2–4%) | Higher (5–8%+) |
| Capital growth potential | Often higher | Often lower |
| Risk profile | Higher (relies on growth) | Lower (income from day one) |
Neither approach is inherently better. The right choice depends on your financial situation, your investment strategy, and how much risk you’re comfortable with.
The Role of Depreciation
Depreciation is a non-cash deduction that can significantly affect your gearing position.
You can claim depreciation on:\
- The building itself (if built after 1987)
- Fixtures and fittings (carpet, appliances, blinds)
This reduces your taxable income without requiring you to spend any money. A property that appears negatively geared on paper might actually be close to neutral after depreciation deductions, or a positively geared property might become more tax-effective.
Get a depreciation schedule from a qualified quantity surveyor. It’s one of the most overlooked tax benefits in property investment.
How Interest Rates Affect Gearing
Interest rates have a direct impact on your gearing position. When rates rise, your loan repayments increase, pushing a neutral or positive property into negative territory.
Many Australian property investors experienced this during recent rate rises. Properties that were comfortably cash flow positive at 2-3% interest rates became negatively geared at 6%+.
When assessing an investment property, stress-test your numbers. What happens if rates increase by 1-2%? Can you afford the shortfall? Lenders will assess your borrowing power based on higher rates than you’re actually paying, and you should too.
What About Capital Gains Tax?
When you eventually sell your investment property, you’ll pay capital gains tax (CGT) on the profit.
In Australia, if you’ve held the property for more than 12 months, you receive a 50% CGT discount. Only half of your capital gain is added to your taxable income.
This is relevant for both gearing strategies, but particularly for negative gearing, where the entire strategy depends on capital growth delivering a profit at sale.
Which Strategy Suits You?
Consider Negative Gearing If:
- You’re on a higher marginal tax rate (37%+)
- You can comfortably afford the ongoing shortfall
- You’re focused on long-term capital growth
- You have a long investment horizon (10+ years)
- You’re buying in a high-growth market
Consider Positive Gearing If:
- You want the property to pay for itself
- You have a lower income or less tax to offset
- You’re building a portfolio and need cash flow to support borrowing power
- You’re approaching retirement and want income
- You prefer lower-risk investments
Or Consider Both
Many experienced property investors hold a mix, some positively geared properties providing cash flow, some negatively geared properties targeting growth. This balance can smooth out risk while still building long-term wealth.
Common Mistakes to Avoid
Chasing tax deductions over good investments
Negative gearing reduces tax, but a bad property is still a bad investment. Don’t buy something just because it’s negatively geared, the fundamentals (location, rental demand, growth potential) still matter most.
Ignoring cash flow sustainability
If you can’t afford to cover the shortfall on a negatively geared property for several years, you might be forced to sell at the wrong time. Build a buffer.
Forgetting about CGT
Capital gains tax takes a chunk of your profit when you sell. Factor this into your long-term goals, especially if negative gearing is your strategy.
Not stress-testing for rate rises
Interest rates can change your entire gearing position. Model different scenarios before you buy.