Negative Gearing: After-Tax Cash Flow Worked Through
ADS Team
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August 20, 2026
3 days ago
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In short: Negative gearing means your property costs more to hold than it earns, and the loss reduces your taxable income. The refund offsets part of the shortfall but never all of it - at a 37% marginal rate, every dollar of loss returns 37 cents, so you are still 63 cents out of pocket.
Key takeaways
- The tax benefit is your marginal rate multiplied by the loss, not the loss itself.
- You fund the shortfall monthly and receive the benefit annually unless you vary withholding.
- Depreciation improves the tax outcome without costing cash.
- A strategy relying on capital growth to justify ongoing losses is a bet, not a plan.
The worked example
$650,000 property, $520,000 loan at 6.5%, $560/week rent, 37% marginal rate:
| Item | Annual |
|---|---|
| Gross rent | $29,120 |
| Holding costs | -$8,138 |
| Loan interest | -$33,800 |
| Cash shortfall | -$12,818 |
| Depreciation (non-cash) | -$7,000 |
| Taxable loss | -$19,818 |
| Tax refund at 37% | +$7,333 |
| After-tax cash position | -$5,485 (~$457/mo) |
Why depreciation matters
Depreciation reduces taxable income without costing cash, so it is the one deduction that genuinely improves your position rather than merely refunding part of a real expense.
In the example, $7,000 of depreciation adds $2,590 to the refund at a 37% marginal rate. A quantity surveyor's schedule typically costs $600-$800 and is itself deductible.
The part that decides the outcome
You are paying roughly $5,485 a year after tax to hold the asset. Over ten years that is about $55,000, before any rate changes.
The strategy works only if capital growth exceeds that. It might; it is not guaranteed. Anyone presenting negative gearing as automatically profitable is describing the tax mechanics, not the investment outcome.
Frequently asked questions
Can I get the benefit during the year?
Yes - a PAYG withholding variation lets you receive it through reduced tax on each pay rather than as a lump sum. It smooths cash flow considerably.
What if my income is low?
The benefit scales with your marginal rate. On a low income the refund is small, so negative gearing is far less effective - and the monthly shortfall is harder to fund.
Does negative gearing apply to shares too?
The same principle applies to borrowing to invest in income-producing assets generally. The rules and risks differ, so get advice specific to the asset.
Related reading
- Rental Yield: Gross vs Net Calculation
- Investment Property Loans: What Is Different
- Rentvesting: Buying Where You Can Afford, Living Where You Want
Sources
- Rental properties - deductions — Australian Taxation Office
- PAYG withholding variation — Australian Taxation Office
Rates checked as at 2 August 2026. Interest rates, lender policies and government schemes change frequently. Figures in this article are illustrative and were accurate at the date shown.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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