Negative Gearing Explained: Tax Break or Wealth Trap?

Key Takeaways

• Negative gearing is when your rental income is lower than your costs, and you can use the loss to reduce your taxable income under current tax policy.
• It can suit higher earners with buffers who believe in long-term capital growth, but cashflow risk is real—especially if rates rise or rents soften.
• Don’t rely on tax cuts or offsets to make a poor asset work. Focus on asset quality, cashflow resilience, and a clear plan to reach neutral or positive gearing.
• Property investors should stress test for housing affordability pressures and rental vacancy rates before jumping in.
• Get personalised advice—your income, goals, and risk tolerance matter more than headlines.

Everyone talks about it — few understand it

“Negative gearing” gets thrown around like confetti at a finance party. Tax break this. Wealth strategy that. But most people can’t clearly explain what it is, when it works, and when it quietly wrecks your financial momentum. Let’s keep it real—no jargon, no politician waffle. Here’s the straight-up version of what negative gearing actually is, and whether it belongs in your wealth plan.

What is negative gearing?

Negative gearing happens when the rental income from an investment property is less than the costs to hold it—think interest, maintenance, rates, insurance, and management fees. In plain English: you’re losing money each year, but you can deduct that loss against your other taxable income under Australia’s current tax policy, which can lower your tax bill.

That means you might get a refund now, but you’re still out-of-pocket until the investment grows or the cashflow improves. For property investors, this only makes sense if the asset quality and location support long-term growth and the cashflow gap won’t strain your household budget.

Why people love negative gearing

Some investors use negative gearing because it reduces taxable income today while they aim for capital growth tomorrow. It can also help you leverage into a higher-value asset than you could otherwise buy, banking on price rises over the long run. For high-income earners in steady jobs, it can be one part of a broader plan. Emphasis on part—not the whole plan. Even with Stage 3 tax cuts on the horizon and ongoing debate about tax policy, relying on tax settings alone is risky; markets change.

The big pitfalls people ignore

Here’s where it bites. Cashflow can get tight fast. You’re subsidising the property from your pay, and if rates rise or rents soften, the personal cash burn gets bigger. There’s also no guarantee of capital growth—if the market stalls or dips, you could be taking losses with little upside. In periods when housing affordability is stretched or rental vacancy rates lift, rents can flatten while costs keep climbing. Without a clear exit or transition plan, many property investors get stuck in a lifestyle trap of ongoing stress and dependence on tax refunds.

Negative gearing only makes sense if the asset is likely to grow and your cashflow can comfortably survive the wait.

When negative gearing can make sense

It’s more likely to work when your income is strong, you’ve got a healthy buffer for rate rises and repairs, and you’re buying in proven, diverse markets with solid long-term demand. Most importantly, you’ve got a clear plan to shift to neutral or positive cashflow over time, or to realise gains when it suits your goals. Treat it as a temporary tactic, not a lifestyle. Keep an eye on policy discussions—whether under the Albanese government or any future government—because tax policy settings can influence after-tax outcomes.

When negative gearing is a bad idea

It’s risky if you’re stretching to hold the property, relying on a tax refund just to get by, or betting on speculative or volatile locations. If the investment can’t stand on its own two feet during a downturn, it’s not a strategy—it’s a gamble. Don’t bank on tax cuts, offsets, or political promises to fix weak fundamentals.

The bottom line: a tool, not a religion

Done right, negative gearing can support a long-term wealth plan. Done wrong, it turns you into a cash-strapped, stressed-out “tax strategy” investor with little to show for it. At Mountway, we don’t worship tactics—we build plans that actually make financial sense for real people.

If you want a practical, numbers-first investment strategy—without the noise—let’s map it out together.