Positive vs Negative Gearing: What's the Difference?
Important Note: This article provides general information only and does not constitute financial advice. Lending criteria, rates and requirements can vary between lenders and may change over time. Consider your circumstances and seek professional advice before making financial decisions.
Property investors often hear the terms positive gearing and negative gearing when comparing investment strategies. While both involve borrowing to purchase an investment property, they describe different cash flow positions.
Positive gearing occurs when a property's rental income is higher than its eligible expenses, while negative gearing occurs when the property's eligible expenses exceed its rental income.
Neither approach is automatically better. The right strategy depends on your cash flow, financial goals, borrowing position, risk tolerance and investment timeframe. Tax rules also need to be considered, particularly following the Australian Government's 2026 Budget changes to negative gearing.
In this guide, we'll explain the key differences between positive vs negative gearing, how each can affect your cash flow and tax position, and what to consider when deciding which approach may suit your investment strategy.
What Is Positive Gearing?
Gearing refers to borrowing money to purchase an investment property. The property is generally funded through a combination of borrowed funds and the investor's own money, with rental income helping to cover the property's ongoing costs.
These costs can include:
Home loan interest
Council rates
Property management fees
Landlord insurance
Repairs and maintenance
Strata or body corporate costs
Certain depreciation and capital works deductions, where eligible under Australian Taxation Office (ATO) rules
Other eligible property expenses
A property is positively geared when the rental income it generates is greater than its eligible expenses.
For example, suppose an investment property generates $40,000 in annual rental income and has $32,000 in eligible expenses. The property would have a $8,000 surplus.
This means the property is positively geared, although the actual tax treatment of that surplus will depend on the investor's circumstances and applicable tax rules.
Benefits of Positive Gearing
Positive gearing may provide several potential benefits:
Improved cash flow: A rental surplus can provide additional income after eligible property expenses are covered.
Less pressure on your personal budget: A property generating positive cash flow may require less financial support from your other income.
Potentially easier to hold long-term: A stronger cash flow position may make it easier to maintain the investment during periods of changing interest rates, vacancies or unexpected expenses.
Positive gearing can therefore appeal to investors who prioritise cash flow and want their investment property to contribute towards their ongoing finances.
However, rental yield should not be the only factor considered when choosing an investment property. Location, tenant demand, property condition, borrowing costs and potential long-term growth also need to be assessed.
This is particularly important for first-time investors, who also need to consider their overall financial position and avoid common investment mistakes.
What Is Negative Gearing in Australia?
Negative gearing occurs when the eligible expenses of an investment property are higher than the rental income it generates. The resulting net rental loss means the investor needs to contribute money from other sources to cover the shortfall.
For example, if an investment property generates $30,000 in annual rental income but has $40,000 in eligible expenses, the property has a $10,000 net rental loss.
Some of those expenses may include:
Home loan interest
Property management fees
Council rates
Landlord insurance
Repairs and maintenance
Strata or body corporate costs
Certain depreciation and capital works deductions, where eligible under ATO rules
Some deductions, such as eligible depreciation and capital works deductions, may affect the calculation of a property's net rental position without being an immediate cash expense. Their availability and treatment depend on ATO rules and the property and expenditure involved.
How Does Negative Gearing Work for Tax Purposes?
The tax treatment of a rental loss depends on the property, the type of expense, when the property was acquired and the investor's circumstances.
Under the rules that currently apply, a net rental loss may be able to reduce other assessable income, such as salary and wages, subject to the relevant requirements.
However, the Australian Government's 2026 Budget introduced changes to negative gearing that will apply from 1 July 2027.
For established residential properties acquired after 7:30pm AEST on 12 May 2026, negative gearing will be restricted from 1 July 2027. Losses from these properties will generally only be deductible against other residential property income, including residential property capital gains.
Excess losses can be carried forward to offset residential property income in future years. They will not be available to offset non-residential income such as salary and wages.
Properties held before the 12 May 2026 announcement are generally exempt from these changes until they are disposed of. Eligible new builds can also continue to be negatively geared under the new rules.
For example, suppose Sarah purchases an established residential investment property after 7:30pm AEST on 12 May 2026 and records:
Rental income: $35,000
Eligible rental expenses: $45,000
Net rental loss: $10,000
Under the rules applying from 1 July 2027, Sarah's $10,000 loss would generally not be available to offset her salary or wages because the property is an established residential property caught by the new rules. Instead, the loss could be used against eligible residential property income, including capital gains, with excess losses carried forward.
This is an important consideration for investors purchasing an established investment property after the 2026 Budget announcement.
It is also important to understand that a tax deduction does not mean the Government simply pays the investor's loss. A deduction can reduce taxable income or tax payable according to the applicable rules, but the investor may still have to contribute money to cover the property's cash flow shortfall.
Because the negative gearing rules are changing, investors should consider both the rules that apply when purchasing a property and the rules expected to apply over the investment's holding period. The ATO provides guidance on rental property expenses and deductions, but individual tax advice should be obtained before making investment decisions.
Positive vs Negative Gearing: The Key Differences
Positive and negative gearing can be compared based on how the property's income and expenses affect your cash flow.
Factor | Positive gearing | Negative gearing |
Rental income | Higher than property expenses | Lower than property expenses |
Cash flow | Positive surplus | Cash shortfall |
Impact on personal budget | May provide additional income | May require additional personal funds |
Tax position | Rental profit may be taxable | Tax treatment of rental losses depends on the property, acquisition date and applicable rules |
Investment focus | Often cash flow focused | Often growth and long-term investment focused |
Financial pressure | Potentially lower | Potentially higher |
It is also possible for a property to change from one position to the other over time. For example, rising rents or falling interest costs may cause a negatively geared property to become positively geared. Conversely, higher interest rates, increased expenses or lower rental income could reduce or eliminate a property's rental surplus.
Which Is Better: Positive or Negative Gearing?
There is no single gearing strategy that is right for every investor.
The more appropriate approach depends on how much cash flow you need, how much financial risk you are comfortable taking and what you are trying to achieve through property investment.
Positive Gearing May Suit Investors Who Want Cash Flow
Positive gearing may be worth considering if you:
Want your investment property to generate surplus cash flow
Have limited capacity to contribute additional money towards an investment property
Prefer a strategy that places less pressure on your household budget
Want rental income to contribute towards other financial commitments
However, a positively geared property may not necessarily be the strongest investment overall. A higher rental yield can sometimes come with different growth prospects, property characteristics or location considerations.
Negative Gearing May Suit Investors Focused on Long-Term Growth
Negative gearing may appeal to investors who are prepared to accept a short-term cash flow shortfall in pursuit of potential long-term investment growth.
An investor may be willing to contribute additional money towards a property if they believe its potential capital growth, rental growth and overall investment prospects justify the ongoing cost.
For example, an investor may purchase a property in an area with strong demand and limited supply, accepting that the property is initially negatively geared while planning to hold it for several years.
However, capital growth is not guaranteed. Investors also need to be able to manage the property's shortfall if interest rates rise, rental income falls or the property remains vacant.
The 2026 Budget changes also mean that investors should not assume the tax treatment traditionally associated with negative gearing will apply to every future established residential property purchase.
What Should You Consider Before Choosing a Gearing Strategy?
Choosing between positive and negative gearing requires more than comparing rental income with property expenses. Consider how the investment fits into your broader financial position.
Your Cash Flow
Consider whether you can comfortably manage the property's ongoing costs, particularly if interest rates increase, rental income falls or the property is vacant.
Your home loan structure can have a significant effect on the property's ongoing costs. Consider:
Interest rates: A higher interest rate can increase borrowing costs and make a property more likely to be negatively geared.
Loan fees: Application, ongoing and other loan costs can affect the overall cost of borrowing.
Repayment structure: Interest-only loans generally have lower required repayments during the interest-only period because you are not paying down principal. However, they can result in higher ongoing interest costs and may make a property more likely to be negatively geared.
Fixed or variable rates: Each option can affect your exposure to future interest rate changes and your ability to adjust the loan. Read more about the pros and cons of fixed vs variable rate home loans.
Offset accounts and redraw facilities: These may provide ways to manage available cash and borrowing costs, subject to the terms of the loan.
Loan flexibility: Repayment options and the ability to change your loan structure may become important as your investment strategy develops.
The lowest advertised interest rate is not necessarily the most suitable option. Consider the loan structure, ongoing costs and flexibility alongside your broader investment strategy.
Understanding your potential repayments can also help you assess whether an investment property fits within your budget. For example, monthly mortgage repayments on a $700,000 house can vary significantly depending on the deposit, interest rate and loan structure.
Your Financial Goals
Think about what you want the investment property to achieve.
If generating income is a priority, positive gearing may be more attractive. If you are focused on long-term capital growth and can comfortably manage a cash flow shortfall, negative gearing may be worth considering.
Your goals can also change over time, so the strategy that suits you today may not be the same strategy you need later.
Your Existing Debt
Your existing financial commitments can affect both your borrowing capacity and your ability to manage an investment property.
Consider your:
Existing home loan
Personal loans
Car finance
Credit commitments
Other regular financial obligations
A property that appears affordable based on its rental income may still place pressure on your finances once your other commitments are taken into account.
Your Risk Tolerance
Negative gearing generally requires the investor to contribute money towards the property when rental income does not cover eligible expenses.
Consider how you would respond if:
Interest rates increased
Rent decreased
The property was vacant
Repairs were unexpectedly required
Insurance or other property costs increased
If a potential shortfall would place significant pressure on your finances, a strategy with stronger cash flow may be more appropriate.
Your Investment Timeframe
Property investment is generally a long-term strategy, so consider how long you expect to hold the property.
A short-term cash flow position may look different several years later if rental income increases, the loan balance decreases or the property's expenses change.
Your expected holding period should also be considered alongside your broader investment goals and potential transaction costs, particularly if you're taking a long-term approach to property investment.
Can a Property Change From Negative to Positive Gearing?
Yes. A property's gearing position is not necessarily permanent.
A negatively geared property may become positively geared if:
Rental income increases
The loan balance decreases
Interest rates fall
Property expenses decrease
Improvements increase the property's rental appeal and income
For example, if a property initially generates $30,000 in rent against $40,000 in eligible expenses, it has a $10,000 shortfall. If rental income later increases to $38,000 while expenses fall to $34,000, the property would instead generate a $4,000 surplus.
The opposite can also happen. A positively geared property could become negatively geared if interest rates increase, rental income falls, the property becomes vacant or significant expenses arise.
Property improvements may also increase rental income, but they require upfront spending.
Investors should consider whether the expected increase in rent justifies the cost.
How Richmond Residential Can Help With Your Investment Strategy
Choosing an investment property involves more than finding a property with a high rental yield. Your borrowing capacity, loan structure, cash flow, investment goals and ability to manage future costs can all influence whether a particular property is suitable for your strategy.
Richmond Residential can help you explore property investment finance options based on your circumstances and goals. Explore our residential property loan options to learn more about the types of finance available.
This may include:
Assessing your borrowing capacity
Exploring investment loan options
Reviewing your existing lending structure
Comparing available lenders and loan features
Considering how a new investment could fit into your existing portfolio
Exploring how available equity may support a future purchase
Structuring finance around your broader investment strategy
If you're considering using equity to help fund another property purchase, you can also learn more about using home equity to buy a new property in Australia.
For an investment property purchase, reviewing your borrowing capacity, deposit and potential loan costs beforehand can help you understand what you can realistically afford.
Final Thoughts
Positive and negative gearing represent two different cash flow positions for an investment property. Neither is automatically better, and the more suitable strategy will depend on your financial circumstances, investment goals and tolerance for risk.
Positive gearing may provide stronger immediate cash flow and less pressure on your personal budget. Negative gearing may require you to contribute additional funds but can form part of a long-term investment strategy where potential capital growth is a priority.
The 2026 Budget changes also make it particularly important for investors to understand how the tax treatment of future property purchases may differ depending on when and what type of property they acquire.
Rather than focusing solely on tax benefits or rental income, consider the full financial picture, including loan repayments, interest rates, property expenses, vacancy risk, borrowing capacity and your intended investment timeframe.
If you're planning to purchase an investment property, Richmond Residential can help you understand the available finance options and how they may fit your investment plans. Contact us today.
FAQs
What is positive gearing?
Positive gearing occurs when an investment property's rental income is higher than its eligible expenses, resulting in a positive rental cash flow position.
What is negative gearing?
Negative gearing occurs when an investment property's eligible expenses are higher than its rental income, resulting in a net rental loss.
Is positive gearing better than negative gearing?
Neither strategy is automatically better. Positive gearing may suit investors who prioritise cash flow, while negative gearing may suit investors who can manage a shortfall and are focused on potential long-term growth.
Can a negatively geared property become positively geared?
Yes. A property can move from negative to positive gearing if rental income increases, interest costs or other expenses decrease, or the property's loan balance changes.
Does negative gearing mean the Government pays your losses?
No. A tax deduction does not mean the Government reimburses an investor for a property's loss. Where a deduction is available, it may reduce taxable income or tax payable according to the applicable rules.
Can I still negatively gear an established investment property after 1 July 2027?
The answer depends on when the property was acquired. Under the 2026 Budget reforms, established residential properties acquired after 7:30pm AEST on 12 May 2026 will generally have their rental losses restricted from offsetting non-residential income from 1 July 2027. Properties held before the announcement are generally grandfathered, while eligible new builds can continue to be negatively geared.
Is rental income taxable in Australia?
Rental income generally needs to be declared as assessable income, with eligible expenses potentially deductible according to ATO rules. The tax treatment depends on the investor's circumstances and the nature of the property and expenses.
Should I buy an investment property just for the tax benefits?
Tax considerations should not be the sole reason for purchasing an investment property. The property's cash flow, location, potential growth, borrowing costs, risks and suitability for your overall financial strategy should also be considered. Tax and property investment rules can change, so consider obtaining professional financial and tax advice before making an investment decision.
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