What Is Negative Gearing and Is It Still Worth It in 2025

If you've spent any time considering property investment, you've almost certainly come across the term 'negative gearing.' The basic concept may be simple. However, its financial consequences and potential opportunities can be complex. If you understand these complexities, you'll secure your financial future.

What is a negatively geared investment property?

If you're purchasing an investment property, you're likely going to borrow money from a bank. After you take possession of the property, you'll face a myriad of expenses, many of which are tax-deductible. Expenses can include:

• Interest expenses.
• Maintenance costs.
• Insurance payments.
• Council rates.
• Property management fees.
• Other property-related expenses.

Investment properties are typically used to earn rental income. If the income generated from the location exceeds the deductible expenses, the property is positively geared. If the rental income is less than the deductible expenses, it's negatively geared.

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Is negative gearing good?

The advantages of negative gearing can depend on your financial situation. High-income earners generally have more to gain from the technique since higher marginal tax rates amplify the impact of deductions. In the 2021-22 financial year, there were approximately 2.2 million people with a property investment. About half that number were negatively geared investors. It may seem strange that you would want to incur a loss on investment properties. So, why is it such a popular investment strategy?

Income tax deductions

The Australian tax system calculates an individual's income tax liability after accounting for the cost of generating the income earned. This is essentially the same as the way a business is taxed on its net profit. Rental earnings form part of your assessable income. Positive gearing increases your overall income and your tax burden. Negative gearing allows you to offset your net rental loss against other income, such as a salary, which will reduce your tax bill.

What does negative gearing look like in action?

Let's suppose you have an annual personal income of $100,000. You own an investment property that generates $15,000 in rent per year but incurs $20,000 in deductible expenses. That $5000 difference will reduce your taxable income to $95,000.

Capital gains tax (CGT) discount

A negative gearing strategy relies on the investor's confidence that the property will experience strong capital growth. Selling a property for a high capital gain more than offsets the negative gearing losses. The Australian Taxation Office (ATO) supports property investors by providing a capital gains tax discount. Have you owned the property for more than a year? CGT will only apply to half of the sale's profit.

What if the property is empty?

A common question about negative gearing is whether or not it can be applied to a property that doesn't generate rental income. The answer is... It depends. The ATO expects the property to be put forward for business. Attempting to negatively gear your personal holiday home risks a tax audit.

That being said, a property can serve different purposes at different times. You may use the house for your personal use during certain months and as a rental property for the rest of the year. This is acceptable as long as you claim deductions for the rental periods only.

What if you're unable to find renters? Making the property available to rent with a real estate agent allows it to be negatively geared, even if you aren't able to attract tenants. The effort to generate business from the property is what counts.

Finding negative gearing opportunities

Negative gearing only works in an environment of rising property values, since you're trading income for capital gains. If you don't get the benefits of sufficient capital growth, negatively gearing rental properties will cost you money in the long term. How do you maximise your chances of success?

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Off-market properties

Off-market properties are locations that aren't listed on major real estate sites but are ready for sale. This provides some exciting opportunities.

• Less competition - Since they're not advertised, off-market properties attract less competition. This can give a buyer greater negotiating power.
• Great deals - Purchasing off-market offers greater potential to secure a property at below-market house prices. This allows home buyers to have built-in equity in the house from the beginning.
• Faster settlements - Sellers don't want to deal with the stress of open houses and other requirements. Selling off-market allows them to complete the sale faster.

Finding off-market properties

If off-market properties aren't put on sale publicly, how do you find them? You can attempt to locate off-market opportunities yourself by contacting the leading real estate agents in your area and being included in their database or email list.

A buyer's agent can do that work. These professionals have access to a greater range of properties through an extensive contact list. FAA Property can connect you with a buyer's agent to identify investment options that suit your individual objectives.

Financing options

There are different lending options you can choose from to purchase established properties. The best solution for you will depend on your circumstances.

Interest-only loan

In this type of loan, you initially make interest payments only for a set period. After the period elapses, the loan reverts to a principal and interest loan, increasing the repayments. The lower repayments during the interest-only portion can free up cash flow to pay off other debts or save money.

There's another major benefit for property investors. If your investment property is rented out, interest repayments can be deducted from your net income at tax time.

Principal and interest loan

With these loans, you begin paying off the principal immediately. The loan can have a fixed-rate term or a variable rate. Fixed interest provides certainty in repayments, while variable rates can potentially allow the borrower to take advantage of lower interest rate environments.

Principal and interest loans can offer lower interest costs over the loan term. However, property investors won't benefit from the same amount of tax deductions.

From our clients

I find FAA Property very client friendly and easy to use.

I find Kayla and her team extremely professional and sort everything out from buying property and managing it.

A big plus is having my Tax done in the same office so all the paid invoices and expenses, get automatically transferred to the wonderful team for Tax.

- Chris Gwin

Clients can reap significant rewards from negative gearing. However, it's important to have the right professional support to ensure that you approach property investing correctly. We have decades of experience helping clients achieve their investing goals. We can assist you in seeking independent legal and financial advice to maximise your financial outcomes.

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Conclusion

Negative gearing is popular in Australia. Rental losses offset interest payments and other expenses against the tax paid on a primary income. Finding the right property can be tricky, but off-market prospects can be found through a buyer's agent. With the right lending arrangements, you'll be able to secure your financial future.

Book a free call to learn how we help QLD investors combine smart lending with exclusive property deals.