Gearing just describes whether your investment property makes or loses money year to year, once costs are counted. Which one suits you isn't about which is "better" — it's about what you're optimising for.
Positive gearing
A property is positively geared when the rent exceeds all the deductible costs — interest, maintenance, rates and insurance — so it puts cash in your pocket each year.
Upside: steady income, lower risk, easier loan approval, and surplus you can reinvest. Downside: the rental income is taxable, and high-yield areas often come with lower capital growth.
Negative gearing
A property is negatively geared when the costs exceed the income, so you top up the shortfall from your own pocket. The trade-off is tax: the loss can offset your other taxable income, and the strategy leans on capital growth to pay off over time.
Upside: the tax deduction, plus exposure to higher-growth areas and the leverage to build assets. Downside: an ongoing cash-flow drain, dependence on the property appreciating, and sensitivity to interest rates.
A simple example
If your salary is $90,000 and your property runs a $5,000 annual loss, you may be able to deduct that loss, reducing your taxable income to $85,000. (Illustrative only — your actual position depends on current ATO rules and your circumstances.)
Which is better?
Neither, universally. Positive gearing favours income and lower risk; negative gearing favours capital growth and tax efficiency but needs cash-flow reserves. The right choice depends on your income, goals, risk tolerance and the market you're buying in — and many portfolios hold a mix.
Two things worth knowing
- Negative gearing reduces income tax, not CGT directly. When you sell at a profit, capital gains tax still applies (with the 50% discount if you've held 12+ months).
- Tax settings can change. Don't build a plan that only works because of a deduction — the property has to make sense on its fundamentals too.
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Book a Clarity Call — It's FreeCommon questions
What is the difference between negative and positive gearing?
Positive gearing means the rent exceeds the property's costs, so it generates surplus income (which is taxable). Negative gearing means the costs exceed the income, so you cover the shortfall — but the loss can offset your other taxable income.
How much tax does negative gearing save?
The net rental loss reduces your taxable income, so the saving depends on your marginal tax rate. For example, a $5,000 loss on a $90,000 salary lowers taxable income to $85,000. Confirm your actual position with your accountant.
Does negative gearing reduce capital gains tax?
No — negative gearing reduces your ordinary income tax. Capital gains tax still applies when you sell at a profit, though properties held 12 months or more generally qualify for the 50% CGT discount.
This article is general information only and doesn't take your personal circumstances into account. It isn't financial, tax or investment advice. Tax rules and lender policies change — confirm your position with a licensed professional or the ATO before making decisions.
