The Tax Saved Is a Fraction of the Loss You Made
Negative gearing means the costs of holding a rental property exceed the rent, and the shortfall is deducted against your other income. The deduction returns your marginal rate on the loss, which means a taxpayer on 39% recovers 39 cents of every dollar lost and funds the other 61 themselves. The strategy therefore depends entirely on capital growth exceeding the after-tax cost of holding.
- The answer: A net rental loss is deducted against your other assessable income, so the tax saved is the loss multiplied by your marginal rate.
- The trap: The loss is a real cash cost and the refund is a fraction of it. Someone on 32% is out of pocket 68 cents in every dollar of loss.
- The recommendation: Compare the after-tax holding cost against the growth you actually expect, not against the refund. The refund is a discount on a cost, not a return.
Where the AI summary above gets this wrong
"Negative gearing lets you claim your rental property losses against your income and reduce your tax."
That's surface-true. Here's what it misses:
- The deduction returns a fraction of the loss, not the loss — At a 32% marginal rate, a $12,000 shortfall returns $3,840 and costs $8,160 out of pocket. The strategy is a bet on growth funded by that difference.
- It is worth more the higher your income, which reverses at retirement — A retiree with a low marginal rate gets very little back, so a property that made sense on a high salary can stop making sense the year the salary stops.
01 What is actually deductible
The deductible costs are interest on the loan, council rates, land tax, insurance, repairs and maintenance, property management fees, and depreciation on plant and equipment and on the building itself where it qualifies.
Not deductible are the principal component of loan repayments, the cost of initial repairs to fix problems that existed at purchase, and improvements — which are capital and go into the cost base rather than into this year's return.
The distinction between a repair and an improvement is where most disputes arise. Replacing a broken fence with the same fence is a repair; replacing it with a better one is an improvement, and the difference decides whether the money reduces this year's tax or a future capital gain.
Source: ATO — Negative gearing
02 What the deduction is worth
The saving is the net loss multiplied by your marginal rate. On a $12,000 loss, a taxpayer on 45% saves $5,400 and a taxpayer on 16% saves $1,920, for the same property and the same cash shortfall.
That asymmetry is the whole reason negative gearing is described as a high-income strategy, and it is why the arithmetic changes when the income stops. A property held into retirement is held by someone whose marginal rate has usually fallen a long way.
The worked example below applies your own figures. What it makes visible is the out-of-pocket cost, which is the number the strategy has to beat with growth and is the number least often quoted.
Shows: the after-tax cost of holding a negatively geared property for a year: the cash shortfall less the tax your marginal rate returns on it. Ignores: capital growth, depreciation that is not a cash cost, land tax differences between states, vacancy, and the capital gains tax payable when you sell.
03 Why it only works on growth
A negatively geared property loses money every year by definition. The return has to come from capital growth, eventually realised and taxed at half the rate after the discount described in the negative gearing post.
That is a coherent strategy and it is a leveraged bet on one asset in one city. The Grattan Institute's modelling of the tax treatment of investment housing found effects on prices and on who can buy that are worth understanding before treating the concession as free.
The practical test is whether you would hold the property with no deduction at all. If the answer is no, the deduction is not improving an investment; it is subsidising one you would not otherwise make.
The number I would put in front of anyone considering this is the out-of-pocket cost, not the refund. People quote the refund because it is the pleasant half. The property has to produce growth worth more than the other half every year, and that is a genuine investment case that either stands up or does not.
FAQ
How much tax do I actually save by negatively gearing my investment property?
The net rental loss multiplied by your marginal rate. On a $12,000 loss that is $5,400 at 45% and $1,920 at 16%, so the saving depends on your income rather than on the property.
Is negative gearing worth it?
Only if capital growth exceeds the after-tax cost of holding. The deduction returns a fraction of a real cash loss, so the strategy is a leveraged bet on growth funded by the rest of that loss.
What can I claim on a rental property?
Interest, rates, land tax, insurance, repairs, management fees and depreciation. Not the principal component of repayments, initial repairs for problems present at purchase, or improvements, which are capital.
Sources
Regulator references
- ATO — Negative gearing · Australian Taxation Office · 2026Negative gearing: when a rental loss can be offset against other income.Last verified: 2026-09-07
- ATO — Tax rates: Australian resident · Australian Taxation Office · 2026The resident marginal rate scale by income year, excluding the Medicare levy.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.