How Negative Gearing Works: A Simple Explainer

Jaeneen Cunningham
Sep 25
3 min read

Negative gearing is one of those finance terms that often pops up in conversations about property investment in Australia—but it can feel a little abstract until you see the numbers in action. In simple terms, negative gearing happens when the costs of owning an investment property outweigh the rental income it generates. The shortfall (or “loss”) can then be offset against your other taxable income, such as salary or business income, reducing the amount of tax you pay.

Let’s break this down with a practical example and then explore how depreciation—an often-overlooked non-cash deduction—can further improve the tax position of an investor.

Example 1: Negative Gearing Without Depreciation

Scenario

Purchase price of property: $600,000
Loan amount: $480,000 (80% LVR)
Loan interest rate: 6%
Annual rent: $24,000 ($460 per week)
Annual expenses (rates, insurance, maintenance, property management, etc.): $6,000

Calculations

Loan interest: $480,000 × 6% = $28,800
Rental income: $24,000
Other costs: $6,000
Total costs: $28,800 + $6,000 = $34,800
Net position: $24,000 – $34,800 = –$10,800 loss

Tax Effect If the investor earns a salary of $100,000 per year, this $10,800 loss reduces their taxable income to $89,200.

At a marginal tax rate of 37% (excluding Medicare levy), the tax saving is:$10,800 × 37% = $3,996

So, while the property has lost $10,800 on paper, the investor’s actual out-of-pocket cost is reduced to:$10,800 – $3,996 = $6,804 per year

Example 2: Negative Gearing With Depreciation

This is where things get interesting. In addition to cash expenses, property investors can often claim depreciation—non-cash deductions that recognise the decline in value of certain aspects of the property over time.

Depreciation Types

Capital works depreciation (Division 43): Covers the building structure—walls, roof, concrete, brickwork. Generally available for residential properties built after 1987, claimable at 2.5% per year over 40 years.
Plant and equipment depreciation (Division 40): Covers removable fixtures and fittings like carpets, blinds, ovens, hot water systems, air conditioners, etc. Rates vary depending on the item’s effective life.

Important notes

You can’t usually claim plant & equipment depreciation on second-hand properties purchased after May 2017 (unless the property was brand new or substantially renovated).
A quantity surveyor’s depreciation schedule is typically required to maximise these claims.

Updated Example Let’s assume the $600,000 property includes:

Eligible capital works deductions: $8,000 per year
Plant and equipment depreciation: $4,000 per year

This adds $12,000 in depreciation to the investor’s tax deductions.

New Tax Position

Rental income: $24,000
Total costs (cash outlay): $28,800 interest + $6,000 expenses = $34,800
Net cash loss: –$10,800 (as in Example 1)
Add depreciation deductions: –$12,000
Total tax-deductible loss: $10,800 + $12,000 = –$22,800

Tax Saving At a 37% tax rate: $22,800 × 37% = $8,436

Effective Cost to Investor Cash outlay: $10,800Less tax saving: $8,436= $2,364 per year

Here's a comparison of those two examples side by side

Comparison of Negative Gearing Example

Item	Without Depreciation	With Depreciation
Rental income	$24,000	$24,000
Loan interest	$28,800	$28,800
Other expenses	$6,000	$6,000
Total cash expenses	$34,800	$34,800
Net cash loss	–$10,800	–$10,800
Depreciation (non-cash)	—	$12,000
Total tax-deductible loss	–$10,800	–$22,800
Tax saving @ 37% rate	$3,996	$8,436
Effective after-tax cost	–$6,804	–$2,364

The effect of the above, with claimable depreciation is a weekly cost to hold the invesmtent property of $45.46 (the after tax loss of $2,364 divided by 52 weeks)

Why Depreciation Matters

As you can see, depreciation doesn’t change the actual cash loss from running the property, but it significantly reduces the effective after-tax cost of holding the investment. It’s essentially a “bonus” deduction that can turn a heavily negatively geared property into something much more manageable.

Over time, as rents rise and the loan balance reduces, a property can move from negatively geared to neutral or even positively geared—where rental income outweighs expenses. Until then, depreciation can play a big role in helping investors manage their cash flow.

Key Takeaways

Negative gearing lets you offset rental property losses against other taxable income.
Depreciation (capital works and plant & equipment) provides non-cash deductions that can greatly reduce the effective holding cost.
Newer properties usually offer higher depreciation benefits.
Professional advice and a depreciation schedule can help you claim the maximum benefit.

👉 At Etairos Finance, we help clients understand how strategies like negative gearing fit into their broader financial goals. We’re friendly, approachable, and know the ins and outs of property finance. If you’d like to explore whether an investment property could be right for you, get in touch—we’d be glad to help.