Understanding Negative Gearing and How It Can Work for You

Introduction

Heard the term negative gearing but not quite sure what it means?

You’re not alone. Many first-time investors are curious about how negative gearing works and why it’s so widely used across Australia. In simple terms, it’s a tax strategy that allows you to offset the costs of owning an investment property against your income, potentially reducing your tax bill while building long-term wealth.

Used wisely, negative gearing can support a strong property portfolio and make holding an appreciating asset more affordable over time. Here’s what you need to know.

1. What Is Negative Gearing?

A property is negatively geared when the costs of owning it exceed the rental income it earns. This includes expenses like mortgage interest, maintenance, property management and insurance.

That net loss can be claimed as a deduction on your taxable income, which reduces the amount of tax you pay.

For comparison, a positively geared property earns more in rent than it costs to hold. While that may boost cash flow, the rental profit is taxable. Many investors prefer negative gearing because it helps reduce taxable income and supports a long-term capital growth strategy.

2. How Does It Work in Practice?

Let’s take a quick example:

• Rental income: $25,000 per year
• Total expenses: $32,000 per year
• Net loss: $7,000

If you earn a salary of $90,000 annually, your taxable income is reduced to $83,000 after applying the $7,000 property loss. That means a lower tax bill at the end of the financial year.

While you’re making a short-term cash flow loss, the real aim is to hold the property long enough to benefit from capital growth. Over time, if the property increases in value, the overall return can far outweigh the initial loss.

3. What Can Be Claimed as a Deduction?

When your property is negatively geared, you can claim a wide range of expenses, including:

• Real estate and advertising for tenants
• Interest on your investment loan 
• Council rates, body corporate/owners corporate fees, land tax and strata fees 
• General repairs and maintenance 
• Cleaning and gardening
• Insurance
• Building depreciation- depending on the age of the building

These deductions can add up quickly, especially with a new or off-the-plan property that qualifies for full depreciation benefits.

4. Benefits of Negative Gearing

There are several reasons why investors use this strategy:

• Immediate tax savings by reducing your taxable income
• Makes it more affordable to hold properties in capital growth suburbs
• Encourages a long-term investment mindset rather than chasing quick returns
• Works particularly well with new or off-the-plan apartments, where depreciation can significantly boost deductions
• Helps build equity over time while minimising out-of-pocket holding costs

At Norus Projects, our developments in Burwood, Ivanhoe and Sandringham are often favoured by investors for these very reasons. Our projects are modern builds with high rental appeal and generous tax offsets.

5. Risks and Considerations

Like all strategies, negative gearing comes with risks that need to be managed:

• You’re still making a real cash-flow loss, so ensure your income can comfortably support it
• Interest rates may rise, increasing your repayments and total holding costs
• The strategy relies on capital growth, which is never guaranteed
• Not all locations or properties are suited for negative gearing; some may not grow fast enough to offset the losses
• Tax laws can change, so it’s important to stay updated on policies that could affect your deductions

6. Who Is Negative Gearing Best Suited For?

This strategy is typically a better fit for:

• Higher-income earners looking to reduce tax while building wealth
• Investors with good cash flow or financial buffers to manage short-term losses
• Long-term thinkers who focus on growth over immediate cash returns
• Buyers of new or off-the-plan properties where depreciation deductions are highest

7. How to Get Started with a Negatively Geared Investment

Ready to explore this strategy? Here are a few tips to get started:

1. Speak with a mortgage broker or financial adviser to assess your borrowing power
2. Review your cash flow to ensure you can comfortably cover short-term losses
3. Look for suburbs with strong capital growth potential and tenant demand
4. Consider off-the-plan apartments in high-performing locations like Burwood, Ivanhoe and Sandringham
5. Work with a property-savvy accountant to maximise your deductions and structure your finances correctly

Conclusion: Negative Gearing Can Be a Powerful Wealth Tool (If Used Wisely)

Negative gearing can be a smart way to reduce your tax bill while building a portfolio of high-performing properties. By understanding how it works and applying it to the right asset in the right location, you can make this strategy work in your favour.

Want to explore negatively geared opportunities? Contact our team at Norus Projects for expert guidance and high-growth property options that suit your investment goals.

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