Focus: How negative gearing affects the cash flow and tax position of a property investor.
Key Takeaways:
You’ve probably heard that property investors can “claim a tax loss” through negative gearing — but what does that really mean? And how much does it cost in real terms?
Let’s break it down using a real-world example. We’ll walk through a $750,000 investment property, looking at actual loan costs, rental income, expenses, and tax implications — so you can see what negative gearing looks like in dollars and cents.
Negative gearing is when your rental property makes a loss — that is, the annual expenses (including interest, maintenance, and depreciation) are higher than the rental income.
While that loss can reduce your taxable income and help with your tax bill, it doesn’t mean the investment is making money. You’re still out of pocket each year.
In high- interest rate environments, more properties are negatively geared — which makes it more important than ever to understand the cash impact and tax offsets involved.
Purchase & Loan Details
Property purchase price: $750,000
Deposit: $37,500 (5%)
Loan: $712,500 (95%)
Interest rate: 6.5% per annum (P&I)
Loan term: 30 years
Annual Costs
Property outgoings (rates, strata, etc.): $6,000
Landlord insurance: $1,500
Rental agent fees: $1,800
Loan repayments (P&I): ≈ $54,042 per year
Total Cost: $63,342
Rental Income
$30,000 per year
Depreciation (non-cash deductions)
Fixtures & fittings: $10,000
Bricks & mortar: $4,000
Total depreciation: $14,000
Note: fixtures depreciation depends on whether assets are new/eligible and on a depreciation schedule.
Step 1 – Work Out the Cash Flow
Annual income: $30,000
Annual expenses (excluding depreciation): $63,420
Cash shortfall: $33,420
This is the real cash cost to the owner — even before tax savings.
Step 2 – Calculate the Tax Loss
Remove principal ($7,808) and add depreciation ($14,000) to the cash shortfall:
$33,420 – $7,808 + $14,000 = $39,612
Tax deductible loss = $39,612
At a 32% marginal tax rate:
Tax refund or saving: 32% x $39,612 = $12,676
Step 3 – Final Cash Impact
Cash loss: $33,420
Minus tax benefit: $12,676
Net cost to investor: approximately $20,744 per year
That’s about $402 per week out of pocket — even after the tax refund.
Warning: this is an example of a typical scenario to show how negative gearing works. Because every situation will have different levels of income, interest rates and costs, you must seek professional advice before proceeding with negative geared investment.
Let’s call our investor Emily. She’s a 35-year-old earning $95,000 a year, putting her on a 32% marginal tax rate. Emily buys a $750k investment property with a 5% deposit and no stamp duty. The property earns $30,000 a year in rent but costs her over $63,000 to hold. Thanks to depreciation, her tax bill is reduced by almost $13,000.
The example illustrates a 30% marginal tax rate at 32% (which includes the 2% Medicare levy).
Isn’t negative gearing free money from the government?
No — you’re still making a real cash loss. The tax refund just softens the blow.
Can depreciation really be claimed if I didn’t spend money?
Yes — depreciation is a non-cash deduction for wear and tear on the building and fittings, as per ATO guidelines. But the property needs to qualify.
Won’t rent increases eventually turn it positive?
Maybe — but rising interest rates or maintenance costs can offset rental growth. It’s not guaranteed.
Is the loan interest tax-deductible?
Yes — but only the portion used for the investment. If you redraw or refinance for personal reasons, that part may not be deductible.
Can I rely on negative gearing forever?
Not usually. As the loan reduces or interest rates fall, many properties become neutrally or positively geared. And tax laws may change in future.
Negative gearing can provide tax benefits — but it still costs real money. In our $750,000 example, the investor is more than $20,000 out of pocket each year, even after tax savings.
If you’re considering this strategy, it’s important to run the numbers — and get help. Knowing your cash flow and tax impact up front can save you big headaches later.
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Disclosure: General information only. Consider your objectives, financial situation and needs, and seek professional advice before acting.
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