Negative gearing vs positive gearing investment strategy - NAB

Gearing: At a glance

  • Negative gearing: Costs are higher than rental income. This creates a loss (which may reduce your taxable income, depending on your circumstances and current tax rules).
  • Positive gearing: Rental income is higher than costs. This creates a surplus.
  • Why it matters: Each approach affects your cash flow, tax position and long-term plans.
  • Good to know: Property investment and tax rules can change. Check official sources for the latest information.

What is negative gearing

Negative gearing is when the cost of owning an investment property is greater than the income it generates, resulting in a loss. Costs can include loan interest, rates, insurance, maintenance and other ongoing expenses.

For some investors, negative gearing is part of a strategy focused on long-term capital growth rather than immediate rental income. Tax outcomes may form part of the appeal, but they’re usually only one part of the decision, not the sole reason for choosing this approach.

Example of negative gearing

Let’s say a property earns $20,000 a year in rent and the investor’s annual costs total $29,000. That leaves a $9,000 loss for the year. Depending on the investor’s circumstances and the rules that apply at the time, that loss may be used to reduce taxable income.

Benefits and costs to consider

Benefits

  • May support a strategy focused on long-term growth.
  • Losses may reduce your taxable income, depending on current tax rules.
  • Can make higher-value or growth-focused properties more accessible.
  • May fit investors who are comfortable trading short-term losses for potential future gains.

Costs and considerations

  • You’ll need to cover any shortfall between rent and expenses.
  • Ongoing costs can put pressure on your day-to-day budget.
  • Higher borrowing can increase exposure to interest rate changes.
  • Vacancies or unexpected repairs may increase your out-of-pocket costs.

What is positive gearing?

Positive gearing is when the income from an investment property is more than the cost of owning it. After expenses like loan interest, maintenance, rates and insurance are paid, the property still generates a surplus.

This may appeal to investors who want the property to support their cash flow sooner. But because the property is generating extra income, it may also affect the amount of tax you pay.

Example of positive gearing

Let’s say a property earns $24,000 a year in rent and annual costs total $12,000. That leaves a $12,000 surplus for the year. This extra income could help cover expenses, build a buffer or reduce debt faster.

Benefits and costs to consider

Benefits

  • Generates extra income once costs are covered.
  • Can help support your day-to-day cash flow.
  • Surplus income can be used to reduce debt or build savings.
  • May feel more predictable for some investors.

Costs and considerations

  • Rental income is generally taxable.
  • Higher-yield properties may not always have the same growth potential.
  • Income can change with vacancies or market conditions.
  • After tax, the net benefit may be lower than it first appears.

Negative gearing vs positive gearing: key differences

The main difference is cash flow. With negative gearing, your property runs at a loss because costs are higher than rental income. With positive gearing, your property generates a surplus because rental income is higher than costs.

Different approaches can suit different situations. Here are a few examples of how investors might think about it. These examples are general in nature and aren’t personal advice.

Focusing on long-term growth

Someone buying in an area where they expect the property to increase in value over time may be more willing to accept a short-term loss, as long as they’re comfortable covering the gap between rent and expenses.

Looking for extra income

Someone who wants their property to contribute to their everyday budget may prefer a property where rental income covers costs and leaves a surplus.

Managing cash flow carefully

If keeping monthly costs more predictable is important, a property that runs at a surplus or breaks even may feel easier to manage than one that needs regular out-of-pocket contributions.

Planning with changing rules in mind

Some investors may also factor in the fact that property investment rules can change over time and consider how different approaches might hold up under different market or policy conditions.

Common deductions for investment properties

If you own an investment property, there may be expenses you can generally claim, depending on your circumstances and current tax rules. The ATO explains that rental expenses can fall into different categories, including expenses you can claim straight away, expenses you may need to claim over time, and expenses you can’t claim.

Common examples may include:

  • Loan interest, where the loan is used to purchase or maintain the investment property

  • Property management and letting fees, including advertising for tenants

  • Repairs and maintenance, such as fixing existing fixtures or wear and tear

  • Council rates, water charges and strata fees

  • Insurance, including building and landlord insurance

  • Depreciation, which may apply to the building structure and certain fixtures over time

How property investment rules can change

Property investment rules can change over time. This includes how negative gearing works and how investment property losses may be treated for tax purposes.

From time to time, governments review how property investment is taxed. This can include changes to how losses are claimed, and whether different rules apply depending on the type of property. We don’t set these rules, but we can help explain the basics and point you to the right sources for the latest information.

Who could be affected?

Changes to property investment rules may affect:

  • people planning to buy an investment property
  • existing investors
  • buyers considering new builds
  • buyers looking at established properties

What changes could mean for you

If rules change, it could affect:

  • how investment property losses are treated at tax time
  • the overall cost of holding an investment property
  • the type of property you consider
  • your longer-term investment strategy

Where to find the latest information

For the most up-to-date information on property investment and tax rules, check official government sources such as the Australian Taxation Office (ATO) and Treasury websites. If you’re unsure how changes may apply to you, you may also want to speak with a qualified tax or financial adviser.

Can negative or positive gearing work for you?

Either approach may work, depending on your circumstances. Things to think about include:

  • your cash flow
  • your tax position
  • your comfort with risk
  • how long you plan to hold the property
  • your broader investment goals

The key is understanding how each approach works, what it may cost you along the way, and whether it fits comfortably within your plans. When you’re ready, our home loan experts can help you explore borrowing options and loan structures to see how an investment property might fit into your plans.

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The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article.

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