Negative Gearing in Australia: How It Works for Rental Properties and Share Investments
Negative gearing allows Australian investors to deduct expenses that exceed the income from a borrowed investment. The resulting loss can reduce your taxable income from salary, wages or other sources. It applies to both rental properties and share-based investments, but the tax benefits differ in each case. Below is a clear, practical explanation with real-world examples, including depreciation for properties and the added advantages of franking credits, foreign tax credits and deferred income for shares, managed funds and ETFs.
What Is Negative Gearing?
You borrow money to buy an income-producing asset. If the deductible expenses — primarily loan interest — exceed the income generated by the asset, you record a net loss. The Australian Taxation Office (ATO) lets you offset that loss against your other income in the same financial year. Any unused loss can be carried forward. The strategy is based on the expectation that future capital growth will eventually outweigh the short-term cash shortfall.
Negative Gearing Rental Properties
Rental properties are the most popular form of negative gearing. You can claim deductions for:
Interest on the investment loan
Council rates, water rates and body corporate fees
Landlord insurance
Property management fees
Repairs and maintenance
Depreciation on the building (capital works deduction) and on fixtures such as carpets, ovens, hot-water systems and blinds (plant and equipment)
Depreciation is a valuable non-cash deduction. Most residential buildings qualify for a 2.5% capital works deduction each year on the building component (land itself is not depreciable). A quantity surveyor’s depreciation schedule often uncovers additional deductible items and maximises your claims.
Example: Negatively Geared Rental Property
Scenario
Purchase price: $700,000 (80% loan-to-value)
Loan amount: $560,000 at 6% interest
Annual interest: $33,600
Gross rental income: $28,000
Other cash expenses (rates, insurance, management fees): $6,000
Depreciation claim (capital works + plant & equipment): $9,000
Calculation Total deductions = $33,600 (interest) + $6,000 (other) + $9,000 (depreciation) = $48,600 Rental income = $28,000 Net rental loss = $20,600
At a 37% marginal tax rate (plus 2% Medicare levy), this loss delivers approximately $8,034 in tax savings for the year. The $9,000 depreciation component alone contributes around $3,330 of that saving without any extra cash outlay.
Over time, as rent increases or the loan balance decreases, the property may move toward positive gearing. You can still benefit from capital growth — that is, an increase in the property’s market value over time — even while the investment remains negatively geared in the early years.
Borrowing to Invest in Shares, Managed Funds and ETFs
The same negative-gearing rules apply when you borrow to buy shares, managed funds or exchange-traded funds (ETFs). Interest on the loan is generally deductible provided the borrowed funds are used to produce assessable income.
Assessable income in this context includes dividends (frank or unfranked), distributions from managed funds or ETFs, and any other income the investment is expected to generate. The investment does not need to pay a dividend in the first year — the ATO accepts that shares or funds have an expectation of producing income (dividends or distributions) over time. However, the dominant purpose must be to earn assessable income, not solely to obtain a tax deduction.
Example: Negatively Geared Share/ETF Portfolio
Scenario
Borrow $100,000 at 6% interest to invest in a mix of Australian shares and a diversified ETF portfolio
Annual interest: $6,000
Dividends received: $4,000 (fully franked Australian shares) + franking credits of $1,714
Grossed-up dividend income: $5,714
Tax outcome
The $6,000 interest is deductible against your other income, creating a small net loss that further reduces your taxable income.
The $1,714 franking credit offsets tax on the dividends and may generate a refund or reduce your overall tax bill.
Foreign tax credits from the ETF’s international holdings provide additional relief against Australian tax.
Any capital growth remains deferred until you sell the assets. If held for more than 12 months, you qualify for the 50% capital gains tax (CGT) discount.
In this example, the combination of the interest deduction, franking credits, foreign tax credits and CGT deferral can make the after-tax cost of borrowing much lower than the headline interest rate.
Important Considerations Before You Gear
Cash flow — Negative gearing creates a genuine monthly cash shortfall. You need sufficient surplus income or savings to service it.
Interest rate risk — Rising rates increase both the loss and the cash burden.
Market risk — Asset values can fall, which can magnify losses.
ATO rules — All expenses must relate directly to earning assessable income. Keep clear records. Complex depreciation schedules or large portfolios usually benefit from professional tax advice.
Current rules — As of April 2026 the negative gearing rules remain in place, but investors should stay informed of any future policy changes.
Negative gearing is a legitimate and widely used strategy that can help build wealth when applied thoughtfully. Rental properties offer strong depreciation benefits, while shares, managed funds and ETFs provide valuable franking credits, foreign tax offsets and the advantage of deferred capital gains.
For advice specific to your financial situation, income level and investment goals, consult a qualified tax accountant. They can model the exact tax outcomes, ensure full compliance with ATO requirements, and help you make informed decisions that align with your long-term objectives.