The biggest version of "claim a cost against your salary" — and the most over-sold. Here's how it really works, with every cost on the table.
1The idea
When a rental property's costs — mostly loan interest plus depreciation — are more than its rent, it runs at a loss. That loss is deductible against your salary, so the ATO shares it at your marginal rate. That's "negative gearing."
But here's the part the ads skip: the refund is not the wealth. It only softens the cost of holding the property. The actual wealth is the property's capital growth, after CGT — and that's a leveraged bet that only pays if the property actually grows.
2Who it's for
You have borrowing capacity and stable income, and can fund a real monthly shortfall.
You can hold for the long term — through rate rises and flat years — without being forced to sell.
It's not for the cash-stretched, the short-term, or anyone buying purely for the tax refund.
3The worked example
A $900k place, $750/wk rent, 6.2% interest, 4% growth, on a $140k salary:
Real net cost to hold (after refund)−$8,906/yr · ~$742/mo
After-tax result over 10 years+$246,164
…of which the tax refund is~2%
Net return per year (avg, after all costs)+$24,616/yr
Read that last line twice: about 98% of the gain is property growth, not the refund. Negative gearing makes a growing asset cheaper to hold — it doesn't make a flat one a winner.
You fund this every month. The tax refund only comes back once a year, after you lodge.
Ease the monthly squeeze: a PAYG withholding variation lets the ATO reduce the tax taken from each pay, so you get the benefit fortnightly instead of waiting for a year-end refund — about $742/mo net.
The year in full
Rent+$39,000
Interest + costs−$55,670
You fund (cash)−$16,670 · $1,389/mo
Tax refund (at tax time)+$7,764
Net cost for the year−$8,906 · $742/mo
Over 10 years
Property value$1,332,180
Gross gain+$432,180
CGT on exit−$96,956
Net holding cost (10 yrs)−$89,060
After-tax result+$246,164
Net return per year (avg, after all costs)+$24,616/yr
The net return is after CGT and all holding costs, and is mostly property growth (a leveraged bet), not the tax refund. Simple average, not a compound IRR. On a P&I loan you'd fund more each month. Ignores stamp duty & selling costs. Estimates only, not personal advice.
5The honest caveats
The refund is your marginal rate of the loss, not 100%. Losing money to get a third of it back is not a win on its own.
Principal repayments aren't deductible, and depreciation you claim is clawed back into a bigger capital gain when you sell.
Leverage cuts both ways. Weak growth, a vacancy, or a rate rise can turn the bet negative. The monthly out-of-pocket is real and due every month.
6How to action it
Model it honestly first — make the growth assumption conservative and check you can fund the monthly cost.
If you buy, get a depreciation schedule from a quantity surveyor to claim everything you're owed.
Consider a PAYG withholding variation to spread the benefit across each pay — and get ownership/structure advice before you sign.
General educational information, not personal tax or financial advice. Negative gearing, depreciation and CGT have significant detail — confirm your specifics with a registered tax agent or at ato.gov.au. Figures are estimates for FY2025-26.