What Is Negative Gearing? A Simple Guide for Property Investors

Jaeneen Cunningham
7 days ago
5 min read

If you’ve spent any time around property investors in Australia, you’ve probably heard the term negative gearing tossed around like it’s just part of the everyday real estate vocabulary. But what does it actually mean, why do people do it, and where does tax depreciation fit into the picture? Let’s break it down without the jargon.

Negative Gearing in a Nutshell

At its core, negative gearing happens when the cost of owning an investment property (loan interest, maintenance, management fees, and other expenses) is greater than the income the property generates (usually rent).

So if your investment property brings in $20,000 a year in rent, but the costs of holding it come to $25,000, you’re running a $5,000 loss. That’s negative gearing.

Now, here’s the kicker: under current Australian tax rules, that $5,000 loss can usually be offset against your other taxable income, like your salary. That means your overall taxable income goes down, and you could end up paying less tax.

Why Would Anyone Want to Lose Money?

It seems counterintuitive—why would investors deliberately buy something that costs more to hold than it earns? The answer lies in a mix of:

Tax Benefits – The ability to offset those losses against income reduces the sting.
Capital Growth – The big play is long-term growth in property value. If a property grows by $50,000 in a year, most investors are happy to wear a $5,000 cash-flow loss.
Leverage – Property allows you to use the bank’s money (your loan) to buy a much bigger asset than you could on your own. Even small growth percentages can translate to big gains when the asset is large.

Negative gearing, then, is really a short-term strategy for long-term gain.

The Importance of Depreciation to Negative Gearing for Property Investors

One of the most powerful tools in making negative gearing “work” for property investors is depreciation.

Depreciation is essentially the tax-deductible decline in value of parts of your property and its contents over time. While you might not feel depreciation as an out-of-pocket cost (unlike mortgage repayments or repair bills), the Australian Tax Office (ATO) allows you to claim it as a deduction.

This is where things get interesting: depreciation can increase your tax refund without costing you a dollar in cash flow.

For example:

Your property costs you $5,000 more than it earns each year (negative cash flow).
You also claim $7,000 worth of depreciation.
On paper, your loss is now $12,000—even though in reality you’ve only “lost” $5,000.
That $12,000 deduction reduces your taxable income, and the resulting tax refund helps offset your real cash losses.

This is why depreciation is often called a non-cash deduction and why it’s so valuable in a negatively geared property strategy.

The Two Main Types of Depreciation

When it comes to property, the ATO recognises two broad categories of depreciation: capital works and plant & equipment.

1. Capital Works (Division 43)

Think of this as the building itself. It covers the structural elements of the property—walls, roof, floors, windows, doors, and fixed assets like concrete driveways.

Rate of deduction: Typically 2.5% per year over 40 years from when the property was built.
Example: If your investment property’s construction cost (not purchase price) is $200,000, you may be able to claim $5,000 per year for 40 years.

Capital works is steady and predictable, forming the backbone of most depreciation schedules.

2. Plant & Equipment (Division 40)

This covers the removable or mechanical parts of a property—things that can wear out or break down faster than the structure.

Items include ovens, carpets, blinds, air conditioners, hot water systems, and even ceiling fans.
These items have varying effective lives, and depreciation rates depend on ATO guidelines. For example, a carpet may depreciate over 10 years, while an oven might be written off over 12.

The catch? Recent changes to legislation mean that for second-hand residential properties, investors generally can’t claim depreciation on pre-existing plant & equipment. However, anything you install new after purchase is still claimable.

Why You Need a Depreciation Schedule

If you’re serious about maximising your property tax deductions, a depreciation schedule prepared by a qualified quantity surveyor is a must.

A good depreciation schedule:

Breaks down all claimable capital works and plant & equipment items.
Spreads deductions out year by year for up to 40 years.
Ensures you don’t miss legitimate claims.
Stands up to ATO scrutiny if audited.

Many investors find the upfront cost of a schedule pays for itself in the first year of tax savings.

Negative Gearing Isn’t Without Risks

While the tax and growth benefits sound attractive, negative gearing isn’t a “free ride.” There are real risks and considerations:

Cash Flow Pressure – You’re deliberately buying an asset that costs you money each year. If your financial situation changes (job loss, interest rate rises, unexpected expenses), that pressure can become overwhelming.
Interest Rates – Most negatively geared properties rely on interest being manageable. Rising rates can turn a manageable shortfall into a major drain.
Capital Growth Isn’t Guaranteed – The whole strategy hinges on the property’s value increasing over time. If it stagnates, you’re left with ongoing losses and little to show for it.
Government Policy – Negative gearing and depreciation rules are often political footballs. Tax benefits available today may not always be as generous in the future.

Is Negative Gearing Right for You?

Negative gearing works best for investors who:

Have a stable income and can comfortably absorb yearly shortfalls.
Understand property is a long-term play (think 7–10 years plus).
Want to use tax effectiveness and depreciation to improve cash flow while banking on growth.
Are willing to get professional advice from accountants, mortgage brokers, and financial planners.

For others—particularly those on tighter budgets—it might not be the best fit.

Final Thoughts

Negative gearing isn’t about “losing money to save tax.” It’s about using the tax system to ease the cost of holding a property that (hopefully) grows significantly in value over time. The magic ingredient that makes it more tax-effective is depreciation—especially when you understand the difference between capital works and plant & equipment deductions.

If you’re considering a negatively geared property, take the time to:

Get a depreciation schedule.
Stress-test your budget against interest rate rises.
Seek professional advice so your strategy aligns with your goals.

Done right, negative gearing can be a powerful wealth-building tool. Done poorly, it can create unnecessary financial strain. As with all things property, knowledge—and the right support—are key

Ready to Explore Negative Gearing?

Negative gearing and depreciation can be powerful tools, but the details matter. Every investor’s situation is different, and the right approach depends on your income, property goals, and financial capacity.

At Etairos Finance, we’re here to help you cut through the complexity. We’ll guide you through loan options, tax-effective strategies, and the ins and outs of property investment so you can make confident, informed decisions.

Whether you’re just starting out or looking to expand your portfolio, we’re friendly, knowledgeable, and we want to help.