Positive vs Negative Gearing: What Property Investors Need to Know

This guide explains what positive and negative gearing mean, how they work in practice, and the strategic considerations for property investors in the current environment.

What is Gearing?

Gearing refers to the relationship between the income a property generates and the costs of owning it. When we talk about a property being "geared," we are describing whether the rental income covers all the ownership costs or falls short.

• Positively geared: Rental income exceeds all property expenses (including mortgage interest)
• Negatively geared: Property expenses exceed rental income
• Neutrally geared: Rental income exactly matches expenses

Positive Gearing Explained

A positively geared property puts money in your pocket each week or month. After paying all expenses including the mortgage, you have surplus cash.

Advantages of Positive Gearing

The benefits of positive gearing are significant. Regular positive cash flow improves your financial position and means less financial stress if circumstances change. It becomes easier to hold the property long-term, and it may help you qualify for additional lending. Importantly, you are not reliant on tax benefits to make the investment work.

Disadvantages of Positive Gearing

The main downsides are that surplus rental income is taxable at your marginal rate, positively geared properties are often found in lower-growth areas, and they may require a larger deposit or lower purchase price.

Negative Gearing Explained

A negatively geared property costs you money each week or month. The rental income does not cover all the expenses, so you need to top up from your other income.

Advantages of Negative Gearing

Negative gearing may allow you to access higher-growth properties in premium locations with potential for stronger capital appreciation. With interest fully deductible from April 2025, rental losses can be offset against profits from other rental properties or carried forward to offset future rental income.

Disadvantages of Negative Gearing

The risks are that it requires regular cash contributions from your income, creates greater financial risk if circumstances change, and ring-fencing rules mean losses can only offset other rental income (not your salary). You also have a reliance on capital growth to generate returns.

Interest Deductibility and Tax Treatment

From 1 April 2025, mortgage interest is 100% deductible for all residential investment properties. This marks a return to full interest deductibility after several years of restrictions, making negative gearing a fully viable strategy once again.

While interest is now fully deductible, the ring-fencing rules remain in place. This means if your rental property makes a loss, you cannot use that loss to reduce tax on your salary or other income. However, you can carry the loss forward to offset future rental profits, or offset it against profits from other rental properties you own.

Learn More: Property Investment Tax Deductions You Should Know About

How to Calculate Your Property's Gearing

To determine whether your property is positively or negatively geared, you need to calculate all income and expenses:

Income

Start with your gross rental income and subtract a vacancy allowance typically of 2-4 weeks per year.

Expenses

Your expenses include mortgage interest payments, property management fees, insurance, rates, body corporate fees if applicable, maintenance and repairs, and other property-related costs.

Which Strategy is Right for You?

The best gearing strategy depends on your personal circumstances, goals, and risk tolerance:

Consider Positive Gearing If:

Positive gearing may suit you if you want regular passive income, prefer lower financial risk, have limited spare cash to cover shortfalls, want investments that stand on their own merits, or are comfortable with regional or secondary locations.

Consider Negative Gearing If:

Negative gearing may suit you if you have strong, stable income to cover shortfalls, are focused on long-term capital growth, want to invest in high-demand locations, have a long investment horizon, or have other rental properties with profits to offset losses against.

Choosing Your Gearing Strategy

With full interest deductibility restored from April 2025, both positive and negative gearing are viable strategies. The right choice depends on your goals: negative gearing can work well if you're targeting capital growth in premium locations and have strong income to cover shortfalls, while positive gearing provides immediate cash flow and lower risk. Remember that ring-fencing means rental losses can only offset other rental income, so factor this into your calculations.