Negative Gearing: Does the Tax Benefit Really Pay Off?

Negative gearing is often seen as an effective tax strategy, but does it always produce better financial outcomes?

In this case study, a high-income earner invested in a negatively geared residential property worth $1 million, funded by an $800,000 interest-only loan at 6%. While annual tax refunds were received due to rental losses, the property generated ongoing cash shortfalls and modest capital growth of just 2% per year.

Over 10 years, the investor contributed $398,400 in total (including the initial deposit and annual shortfalls). When the property was sold, after selling costs and capital gains tax, the net equity received was $342,711 — leaving the investor worse off despite the tax benefits.

By comparison, investing the same funds into a simple fixed interest investment earning 1.5% after tax (reflecting a gross 2.5% return reduced by tax for a high-income earner) would have resulted in a value of $462,359, making the investor $119,648 better off.

KEY TAKEAWAY:

Tax deductions alone do not guarantee a good investment outcome. Negative gearing relies heavily on strong growth, higher rental yields, or lower borrowing costs. Investment decisions should always be based on overall returns, not just tax savings.

If you’d like to review whether negative gearing suits your circumstances, please contact us for personalised advice.