When you hear the term negative gearing, what comes to mind? Tax perks for investors, sky-high house prices, or a clever way to build wealth? Depending on who you ask, it’s either a pillar of Australia’s property investment landscape or a controversial policy driving up inequality. In truth, it’s a bit of both.
In this article, Ausfirst Lending Group unpacks negative gearing in Australia from a macro-to-micro perspective, starting with why it exists, zooming in on who it affects, and helping you figure out what it really means for your financial future. Whether you’re a homeowner, investor, or curious observer, understanding this policy is key to navigating Australia’s complex housing market with confidence.
Why Does Negative Gearing Exist in Australia?
The Origins of the Policy
Negative gearing has been part of the Australian tax system since the 1930s. As a common property investment tax strategy, it allows investors to deduct rental losses such as loan interest, maintenance, insurance, and depreciation from their total taxable income. This means if the cost of owning the property exceeds the income it generates, the investor can offset that loss against their wages or salary. The result is a lower tax bill in the current financial year, even if the property itself isn’t profitable yet.
The original intent was to encourage individuals to invest in rental housing and help meet national demand for accommodation. By using tax incentives to nudge private citizens toward property ownership, the government could avoid taking on the full burden of public housing supply.
Over time, this evolved into a widely accepted investment strategy. Today, negative gearing plays a significant role in shaping the Australian real estate market and broader economic fabric, influencing not just individual decisions but also lending behaviour, housing policy, and long-term national infrastructure planning.
How It Compares Globally
Australia’s model of negative gearing is relatively generous by international standards. While property tax deductions in Australia are relatively broad, other countries often impose tighter restrictions.
For instance:
- New Zealand introduced rules in 2021 that restrict the deductibility of interest on home loans for investment properties, particularly for existing housing stock. This was aimed at curbing speculative investment and easing pressure on affordability.
- In the UK, landlords can no longer deduct mortgage interest payments in full. Instead, they receive a 20% tax credit on interest costs, which disproportionately affects higher-rate taxpayers.
- In the US, losses from rental properties can only be deducted up to a certain threshold unless the investor actively participates in property management. This narrows the benefit to hands-on landlords.
By contrast, Australian investors face few barriers in accessing the full tax offset, making the strategy both accessible and attractive, especially to those who understand how to leverage it effectively.
The Role of Negative Gearing in the Property Market
How It Influences Housing Demand and Prices
By offering a tax incentive for investment, negative gearing has long contributed to demand-side pressure in the housing market. With more individuals purchasing property for tax reasons, not just lifestyle or necessity, the competition intensifies, particularly in metropolitan areas with limited stock.
This increased demand can affect housing affordability in Australia, especially when combined with historically low interest rates and population growth. Properties in inner-city areas or near major employment hubs often see the most intense competition, pushing prices higher and creating a feedback loop where capital gains become a major part of the investment strategy.
It’s worth noting that negative gearing doesn’t necessarily create investor interest, but it can amplify it by making the financial side of property ownership more manageable in the early years. Investors are often more willing to tolerate a short-term loss in exchange for long-term growth and tax relief.
The Investor Effect: Supply and Construction
One common argument in favour of negative gearing is that it helps boost the rental supply. When investors enter the market, they typically rent out properties, which can reduce pressure on vacancy rates and provide more options for renters.
However, research by the Australian Housing and Urban Research Institute (AHURI) suggests most negatively geared investors buy existing dwellings rather than building new homes. This limits the policy’s impact on housing supply and instead shifts its influence more towards demand and price levels.
In areas with significant new development, such as outer suburbs or regional growth zones, investor activity may support the feasibility of new projects. But in high-density inner-city markets, investors often compete with first-home buyers for the same pool of established properties, potentially pricing them out.
The result is a nuanced impact: helpful in some contexts, but problematic in others.
Who Really Benefits from Negative Gearing?
Income Brackets and Investor Segments
It’s a common belief that only the wealthy benefit from negative gearing, but ATO statistics show that it’s used across income brackets. Around 60% of those who claim negative gearing deductions earn under $80,000 a year. But this doesn’t tell the full story.
Many of these claimants are middle-income earners with strong equity positions or dual incomes, allowing them to absorb short-term losses. For them, negative gearing isn’t a wealth-creation tool so much as a tax efficiency strategy. They may only own one or two properties and rely heavily on wage income to cover shortfalls.
On the other hand, higher-income investors typically receive more substantial tax benefits due to their higher marginal tax rates. They can also borrow more, diversify across multiple properties, and better weather market downturns, positioning them for greater long-term gains.
High-Income vs Middle-Income Outcomes
What often separates outcomes is how well an investor can handle financial risk and take advantage of future growth opportunities. A high-income investor can treat negative gearing as part of a sophisticated, multi-layered wealth strategy. This may include using trusts, SMSFs, or capital gains planning. Meanwhile, a middle-income earner may have fewer buffers, less access to expert advice, and a stronger reliance on future price growth just to break even.
This divide raises important equity questions. Is the tax benefit truly helping everyday Australians build wealth, or is it reinforcing existing advantage?
What Happens If Negative Gearing Is Removed?
Past Proposals and Political Debates
Negative gearing has been a political flashpoint for years. Labour’s 2016 and 2019 proposals aimed to limit negative gearing to new builds only, effectively preserving the incentive for those who contribute to housing supply while reducing speculative pressure on established homes.
While the policy was well modelled and had expert backing, including from the Grattan Institute and former Treasury officials, it was met with fierce opposition. Critics warned of potential price drops, landlord exits, and impacts on renters if investors pulled out of the market.
In the face of public anxiety, especially among retirees and aspiring investors, the proposal was shelved post-election. Since then, both major parties have steered clear of reviving the issue, despite calls for reform from housing advocates and economists.
What the Modelling Suggests
Independent modelling suggests that changes to negative gearing would not “crash” the housing market but could lead to modest price adjustments, typically around 2–4% nationally, according to the Grattan Institute.
Importantly, this change would likely affect investor-heavy suburbs more than owner-occupied areas. Rents might rise slightly in the short term if investor numbers fall, but increased public housing investment or tax-neutral reforms could offset that.
Ultimately, removing or reforming negative gearing won’t solve the housing crisis alone. But it could be part of a broader suite of solutions to improve fairness and long-term affordability.
Property Investment and Wealth Inequality
The Bigger Picture: Wealth Gaps and Intergenerational Divide
Property investment has become a core part of wealth-building in Australia, and negative gearing plays a direct role in shaping who gets ahead. Those who can buy early or leverage family support often gain access to rapidly appreciating assets, while others are left renting or saving for longer just to get a foot in the door.
This deepens the generational wealth divide. Younger Australians, especially those without family help, face more hurdles entering the market, even as property becomes the most tax-favoured asset class. Meanwhile, older or wealthier individuals can recycle equity, buy again, and amplify gains through repeat gearing strategies.
According to ABS data, the gap in net household wealth between owners and renters continues to grow, raising broader questions about the fairness and sustainability of current tax settings.
Reform Calls and Equity Considerations
Policy experts have long suggested fine-tuning rather than abolishing negative gearing. Some of the more thoughtful proposals include:
- Setting a limit on how many investment properties can be negatively geared may help reduce excessive speculation in the market
- Means-testing tax benefits to reduce the skew towards high-income earners
- Providing offsetting incentives for first-home buyers or key workers to balance the playing field
- Requiring interest-only periods to be phased down for negatively geared loans
These reforms could still support a functioning rental market while creating a more equitable system that benefits a wider slice of Australians.
The Personal View: What It Means for You as an Investor
Does Negative Gearing Work in Your Situation?
If you’re thinking about investing in property in Australia, it’s crucial to look beyond the tax deduction. Ask yourself:
- Can you afford to hold the property for 7–10 years without relying on tax offsets to stay afloat?
- Are you investing in an area with strong capital growth prospects or just chasing short-term savings?
- Would you still make the purchase if negative gearing didn’t exist?
The answer depends on your income, financial goals, time horizon, and appetite for risk. A tax benefit should be the icing, not the cake. Your investment must still stand on its own financial merit, even without the gearing advantage.
Navigating Uncertainty with Informed Planning
Negative gearing policy changes may not be imminent, but the conversation around tax reform isn’t going away. It’s smart to future-proof your decisions now.
Some ways to do this include:
- Building in higher interest rate assumptions when forecasting cash flow
- Exploring positively geared options in regional or dual-income properties
- Keeping strong liquidity so you’re not forced to sell in a downturn
- Working with experts who understand the full tax and mortgage picture
A well-planned property strategy should empower you to make confident decisions, not leave you exposed to legislative changes you can’t control.
If You Choose to Use Negative Gearing: Do It Responsibly
Here’s how to approach negative gearing with clarity, caution, and confidence:
1. Run the numbers carefully
Factor in vacancy rates, ongoing maintenance, and rate rises, not just the mortgage.
2. Plan for rising interest rates
Use a buffer of 2–3% to test whether your investment remains viable under pressure.
3. Have a cash buffer
It’s a good idea to keep enough savings on hand to cover at least three to six months of property-related costs in case something unexpected comes up.
4. Avoid overleveraging
Just because you can borrow doesn’t mean you should. Stay within safe lending ratios.
5. Diversify your portfolio
Combine property with shares, super, or business investments to spread your risk.
6. Review your plan annually
Check if the property still meets your goals, and adjust your strategy as needed.
7. Seek independent advice
Engage with a mortgage broker, tax adviser, and property strategist. Getting it right from the start can save you tens of thousands down the line.
Making Smarter Property Decisions Starts with Clarity
Negative gearing is about more than tax savings. It’s a lens into how Australia’s property system works, and how individual decisions ripple out into larger trends.
You don’t need to be a policy expert to make good choices. But understanding the levers behind the system gives you a powerful edge. Whether you’re just starting or planning your next move, a thoughtful strategy grounded in real insights can help you make smarter, more resilient financial decisions.
Talk to a Mortgage Broker Who Gets It
If you’re ready to explore property investment or want to understand how gearing could fit into your financial roadmap, speak with a mortgage broker who understands the Australian market inside out. The right advice could help you secure finance, reduce risk, and make your next move with clarity.
Let’s make property work for you, not just the system.
Frequently Asked Questions (FAQs)
It’s a fair question. While over half of negatively geared investors in Australia report taxable incomes under $80,000, the real financial upside often favours higher-income earners. Why? Because the value of the tax deduction increases with your marginal tax rate. If you’re in a lower bracket, the cash-back effect of negative gearing may be modest, especially once you factor in rising interest rates, vacancy risks, and upfront costs like stamp duty.
That doesn’t mean it can’t work for you. If you’ve got a stable income, a long-term investment horizon, and realistic expectations, negative gearing could still help you build wealth over time. Just make sure you’re not stretching your budget to chase a tax break. The property should make sense as a standalone investment, even without the deduction.
Negative gearing has survived several policy debates, but the possibility of change is always on the table. While neither major party has an active plan to remove it right now, housing affordability remains a hot issue. Policy experts, including those from the Grattan Institute, often suggest changes that focus on improving tax fairness and boosting housing supply.
To stay prepared, it’s smart to build flexibility into your investment strategy. Consider choosing properties that could be cash-flow neutral or positive within a few years. Always run your numbers without the tax offset included so you’re not reliant on it. And if you’re highly geared, make sure you’ve got buffers in place in case interest rates rise or tax laws shift.
Not necessarily. But for many investors, capital growth is a big part of the strategy. Negative gearing works best when you expect the property’s value to increase enough over time to outweigh the short-term losses. In other words, you’re often trading immediate cash flow for longer-term gain.
That said, not every negatively geared investor sells. Some choose to hold the property for decades and use capital growth to unlock equity for future purchases or retirement funding. Others might switch to a positively geared position over time as rents increase. Either way, the property should have strong fundamentals like location, demand, infrastructure, not just tax appeal.
Yes, you can. But how the benefits are shared depends on how you structure the ownership. If you and your partner buy the property as joint tenants, losses are typically split 50/50. That may not be ideal if only one of you is in a higher tax bracket.
Alternatively, purchasing as tenants in common allows you to allocate different ownership percentages. For example, if your partner earns more, they might own 90% of the property to claim a larger share of the losses. Just be sure to get tailored tax and legal advice before deciding. Structuring it correctly from the start can significantly impact how much benefit you get from negative gearing.
A common risk with negative gearing is borrowing too much based on the assumption that tax benefits or price growth will “rescue” your investment. This can backfire, especially in a rising interest rate environment or if the property doesn’t appreciate as quickly as expected.
To avoid overleveraging, use a conservative borrowing approach. Aim for a loan-to-value ratio (LVR) of 80% or lower if possible, and stress-test your repayments at rates 2–3% higher than current levels. Ask yourself: could I comfortably hold this property if interest rates rose, if rent dropped, or if the tax rules changed?
A mortgage broker can help you model different scenarios and ensure your plan isn’t just viable now, but resilient into the future.
