Negative Gearing Explained: How It Works & What It Really Costs

Updated 30 Nov 2025 · 4–6 min read

What is Negative Gearing?

Negative gearing occurs when the ongoing costs of an investment property are higher than the rental income it produces. In other words, the property makes a loss each year.

In simple terms:

Under Australian tax rules, this loss may be used to reduce your taxable income. That can result in a tax refund or lower tax payable, which reduces the out-of-pocket impact. But it is still a real loss — you are just getting some of it back via the tax system.

Why Do Investors Use Negative Gearing?

Negative gearing is common in Australia because many investors are comfortable taking a short-term loss if they expect long-term growth.

• Tax benefits: The property loss can often be deducted against your income, reducing the tax you pay.
• Access to higher-growth areas: The tax offset may help make inner-city or high-demand suburbs more affordable to hold.
• Long-term strategy: Investors may accept a yearly loss if they expect capital gains to outweigh the cashflow cost over time.

However, negative gearing is not free money. If the property does not grow in value, or if interest rates and expenses rise, the investor fully absorbs the losses.

How Negative Gearing is Calculated

The basic calculation compares:

• your rental income, and
• your property expenses, including loan interest.

1. Rental Income

This includes the rent you receive from tenants plus any other income (for example, parking, storage, or laundry income).

In practice, rental income is rarely 52 full weeks per year. That’s why we adjust for vacancies to get a more realistic figure.

2. Property Expenses

Common costs included in negative gearing calculations are:

• Loan interest (often interest-only for investors)
• Property management fees
• Council and water rates
• Insurance
• Repairs and maintenance
• Body corporate / strata fees
• Other ongoing costs

3. Net Position Before Tax

Your net position before tax is:

Net Before Tax = Total Rental Income – Total Expenses

If this amount is negative, the property is negatively geared. If it is positive, the property is positively geared.

4. Tax Effect

If you are negatively geared, the loss may reduce your taxable income. The impact depends on your marginal tax rate.

Example: If your property loss is $10,000 and your marginal tax rate is 32.5%, your tax reduction may be approximately $3,250.

If your property is positively geared, the profit may increase your taxable income, meaning you could pay additional tax on that profit.

How the Negative Gearing Calculator Works

The BorrowPower Negative Gearing Calculator is designed to show you the after-tax cashflow impact of an investment property in clear dollar terms.

When you use the calculator, you’ll see several key outputs. Here’s what each one means.

1. Gross Rental Income (after vacancy)

This is your annual rent adjusted for the vacancy rate you entered.

For example:

• Annual rent: $30,000
• Vacancy rate: 5%
• Effective rent used in the calculator: $28,500

2. Total Annual Expenses

This combines your loan interest and all other running costs.

• Loan interest: Calculated from your loan amount and interest rate (assuming interest-only repayments).
• Other expenses: Management fees, rates, insurance, strata, repairs, and any other property costs you include.

The calculator adds these together to show your total annual expenses.

3. Net Position Before Tax

This is your rental income minus your total expenses. It shows whether the property is making a profit or loss before any tax benefits or tax payable are considered.

For example:

• Gross rental income (after vacancy): $28,500
• Total expenses: $44,000
• Net position before tax: –$15,500

A negative number here means the property is negatively geared.

4. Tax Effect (Refund or Extra Tax)

The calculator then applies your selected marginal tax rate to estimate the tax impact:

• If your net position is negative, it estimates the potential tax refund or tax saving from claiming that loss.
• If your net position is positive, it estimates the additional tax you may need to pay on the profit.

This gives you a realistic view of how the tax system changes the final result.

5. Net Position After Tax (per year)

This figure shows the combined effect of your cashflow and the estimated tax outcome.

Net After Tax = Net Before Tax + Tax Effect

This number is often less negative than your before-tax result if the property is negatively geared, or slightly lower than your before-tax profit if it is positively geared.

6. Net Position After Tax (per week)

Many investors think in weekly numbers, so the calculator converts your after-tax result into a weekly figure.

Weekly After Tax = Net After Tax ÷ 52

This tells you the real-world weekly cost (or profit) of holding the property after tax.

Example: Putting It All Together

Here is a typical scenario to illustrate how the numbers work in the calculator:

• Annual rent: $30,000
• Vacancy rate: 5%
• Loan amount: $600,000
• Interest rate: 6%
• Other expenses: $8,000
• Marginal tax rate: 32.5%

The calculator may show something like:

• Gross rental income (after vacancy): $28,500 per year
• Total annual expenses: $44,000 per year
• Net position before tax: –$15,500 per year
• Estimated tax refund / saving: around $5,000 per year
• Net position after tax: roughly –$10,500 per year
• After-tax cost: about –$200 per week

This view helps you decide if the expected long-term capital growth justifies the short-term weekly cost.

Pros and Cons of Negative Gearing

Potential benefits

• Reduces taxable income when the property is making a loss
• Can make higher-priced growth areas more affordable to hold
• Supports long-term capital growth strategies

Key risks

• Still a real cash loss each year, even after tax
• Requires stable income and good buffers
• Vulnerable to interest rate rises and higher expenses
• Relies on future property price growth, which is not guaranteed

Frequently Asked Questions

Is negative gearing always a good idea?

No. Negative gearing can be appropriate for some investors with strong incomes, good buffers, and a long investment horizon. For others, the ongoing cash loss may create financial stress, especially if rates rise or the property does not grow as expected.

Does the calculator include tax depreciation?

The BorrowPower Negative Gearing Calculator focuses on the main cashflow items: rent, interest, and typical running costs. Tax depreciation schedules and non-cash deductions are not automatically included, as these vary by property and need professional advice to estimate.

Do all lenders treat negative gearing the same way?

No. Lenders have different credit policies. Some may shade rental income, apply different expense assumptions, or treat negative gearing differently when assessing your borrowing capacity. Our calculator is a general guide, not a lender credit calculator.

What tax rate should I choose in the calculator?

If you’re not sure, you can start with an approximate marginal tax rate based on your income bracket (for example 30% or 32.5%). For an accurate rate and to understand how negative gearing affects your overall tax, speak with an accountant or tax adviser.

Where can I check my borrowing power?

You can use our main Borrowing Power Calculator to see how income, expenses, interest rates, and buffers combine to set your maximum loan size. You can then use the Negative Gearing Calculator to understand the cashflow impact of a specific investment property.

Try the Negative Gearing Calculator

Use the calculator to see your own numbers in action:

Negative Gearing Calculator