For decades, negative gearing has been a popular property investment strategy in Australia. Many investors believe it’s a smart way to reduce tax while building long-term wealth. But here’s the uncomfortable truth: negative gearing is not always the financial advantage it appears to be.
What Is Negative Gearing?
Negative gearing happens when the income you earn from an investment property (rent) is less than the expenses of owning it (loan interest, maintenance, insurance, property management, and other costs).
Because you’re making a loss, the Australian Taxation Office (ATO) allows you to offset that loss against your other taxable income. The result is a reduction in the amount of tax you pay.
This sounds attractive — but let’s dig deeper.
The Problem With Relying on Tax Benefits
Many Australians assume that if they’re getting a tax refund through negative gearing, the strategy must be working. The reality is:
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You’re still losing real cash every month.
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The tax benefit only refunds a portion of your loss, not the entire amount.
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If the property market doesn’t rise strongly enough, you may never make back the shortfall.
In short, negative gearing is not a profit strategy — it’s a loss strategy with a tax offset attached.
A Simple Example
Imagine you buy an investment property and the numbers look like this:
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Rental income: $20,000 per year
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Loan interest and expenses: $30,000 per year
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Net loss: $10,000 per year
If you earn $100,000 in salary, you can offset the $10,000 loss against your income, which reduces your tax. At a 37% tax rate, you save $3,700 in tax.
But here’s the catch:
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You’re still out of pocket $6,300 per year ($10,000 loss minus $3,700 tax benefit).
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If property prices rise strongly over time, capital growth may outweigh the annual losses.
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If prices stagnate or fall, you’ve lost both money and opportunity.
When Negative Gearing Works — and When It Doesn’t
Negative gearing can work if:
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You’re in a high income bracket and benefit more from the tax offset.
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You’re confident about strong capital growth in the property market.
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You can comfortably manage the ongoing cash flow losses for many years.
Negative gearing does not work if:
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Your income is lower, meaning the tax offset is minimal.
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You’re relying purely on tax benefits to justify the investment.
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Property values rise slowly, or you need positive cash flow to support your lifestyle.
Alternatives Worth Considering
Instead of relying on negative gearing, investors should also look at:
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Positive cash flow properties — properties where rent covers expenses and even generates surplus income.
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Debt reduction strategies — reducing interest costs by reviewing your loan structure or using offset accounts.
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Diversification — balancing property with other asset classes like shares, ETFs, or superannuation contributions.
The Bottom Line
Negative gearing is not a guaranteed pathway to wealth. At best, it’s a calculated risk that depends heavily on capital growth. At worst, it’s a strategy that leaves investors losing money year after year while hoping the market will eventually bail them out.
Before jumping in, it’s important to ask: Am I investing for real profit, or just for a tax refund?
At SW Global Finance, we work with clients to design financial strategies that go beyond tax perks — strategies that focus on building lasting wealth and financial security.
Call/WhatsApp: +84 96 275 92 07
Email: support@sw-globalfinance.com.au