What’s the difference between positive and negative gearing?

Recent changes to negative gearing rules have left many Australians wondering what it means for their investment plans. 

If you’ve been thinking about investing in residential property, it’s natural to wonder if real estate remains a practical path to support your financial future or if the goalposts have moved too far.

To keep things simple, looking at the core concept of gearing is a helpful starting point. Whether a property is positively or negatively geared generally depends on how your rental income balances against your ongoing holding expenses. 

Because both options come with potential benefits and risks, understanding how they work may help you make informed decisions that work for your long-term goals.

What exactly is gearing?

Gearing is simply a term for borrowing money to invest. You can borrow money to invest in shares or a business, but given our national fixation on housing, gearing is most commonly discussed in the property market. If you buy an investment property, the income you earn will generally be either negatively or positively geared.

How does negative gearing work in practice?

Negative gearing typically happens when the ongoing costs of running an investment property - such as loan interest, insurance or maintenance - exceed the rental income it generates. Put simply, the investment runs at a cash flow loss. 

Example: If you rent out a property for $30,000 per year but your holding expenses (mortgage, council rates, property management, etc.) are $40,000 per year, your net loss is $10,000. This property is negatively geared.

What do negative gearing tax changes mean for me?

Historically, investors could offset net rental losses against other taxable income, like a salary, to lower their overall tax bill. 

However, following 2026-27 Federal Budget reforms designed to boost the nation’s new housing supply, negative gearing rules are changing. Under new reforms, investors in established properties purchased after 12 May 2026 will generally no longer be able to offset rental losses against salary income. Instead, those deductions are quarantined. This means they are carried forward to lower future rental profits, or capital gains when you eventually sell the property.

Note: To provide financial certainty for existing property owners, residential investment properties bought before 12 May 2026 are fully grandfathered under the old negative gearing treatment, meaning they are exempt from these changes. Newly built residential properties also remain exempt, supporting the policy’s goal of increasing housing construction.

What are the potential benefits and risks of negative gearing?

Running an investment property at a loss can feel counterintuitive at first. For many Australians, the plan to eventually sell the property for a profit outweighs the short-term challenge of managing a loss-making asset. But you need to ensure the trade-offs fit comfortably with your life.

On the positive side, if you invest in a new build, the traditional tax benefits remain intact. Offsetting rental losses against your personal salary lowers your overall taxable income and reduces your year-end tax bill. 

However, those benefits come with risks. Running a property at a loss means you have to be comfortable covering monthly shortfalls while still managing your day-to-day living expenses. Because a negatively geared property relies on your personal income to cover expenses, sudden interest rate hikes or an unexpected change in employment can increase financial pressure. 

Property markets also fluctuate. A slow market could mean you need to manage cash losses for longer than planned. If you want to understand the long-term tax implications of selling, you can get up to speed on potential capital gains tax considerations.

What about positive gearing?

Positive gearing is when the rental income you receive from your property is higher than your total holding expenses. This means the investment is putting extra money directly into your pocket each month. 

It’s easy to see why many investors favour this approach. A positively geared asset doesn’t rely on your regular salary to cover costs. Because it typically covers its own costs, that extra cash could be used to meet loan repayments or boost your retirement savings (such as making additional voluntary contributions to your super).

But like any financial choice, there are key trade-offs. Because this approach leaves you with a net profit, the surplus income is generally subject to tax at your marginal rate. While it’s a good problem to have, this means your actual after-tax return will be lower than the raw cash flow suggests.

Additionally, no investment stays completely static. Shifting local vacancy rates, changing rental demand or sudden maintenance spikes mean your monthly surplus can fluctuate from one year to the next.

How do I know which investment approach may suit me?

Deciding how to approach property investment depends on your individual circumstances. Because everyone’s budget and life looks a little different, taking a moment to check a few personal decisions can help you choose the option that works for you:

• Your daily budget and income stability: If you lean toward negative gearing, you generally need to be comfortable absorbing ongoing monthly shortfalls without straining your day-to-day expenses.

• Your relationship with risk: Some investors are comfortable managing a monthly shortfall because they’re focused on long-term capital growth. Others prefer the peace of mind that comes with a positively geared property generating monthly income.

• How long you plan to hold the property: Property takes time to grow in value. Negative gearing generally requires a longer timeline - often 5 to ten years or more - to give the market enough time to grow and outpace your initial costs.

• Room for the unexpected: Interest rates move, council rates rise and properties occasionally sit vacant. Before locking in a strategy, you may want to ensure your budget has flexibility to handle a sudden jump in holding costs. 

• The landscape of the local market: Regional hubs or high-density city apartments often deliver the rental yields needed for positive gearing, while freestanding suburban homes might offer stronger long-term growth prospects despite lower initial rent.

Like with all investments, it's a good idea to speak to your financial adviser or accountant to understand the risks and benefits involved.