Positive vs negative gearing explained
What positive and negative gearing mean for your cash flow and your tax, with a worked example of each and which suits which investor.
Gearing is whether your investment property makes or loses money each year before tax.
Negative gearing
Your property is negatively geared when expenses exceed income, and that loss reduces your taxable income.
Example: $25,000 rent income – $32,000 expenses (interest, rates, insurance, depreciation) = –$7,000 loss. On a 37% marginal tax rate, that saves you $2,590 in tax.
You're spending real money to claim a deduction, so the trade only pays off if the property grows in value.
Positive gearing
Your property is positively geared when income exceeds expenses. You're making money from day one, but the profit gets taxed.
Example: $30,000 rent income – $24,000 expenses = +$6,000 profit. At a 37% tax rate, you owe $2,220 extra, and you're still $3,780 ahead once that's paid.
Which is better?
It depends on your income and your goals. High-income earners often start negatively geared to offset tax while betting on capital growth. Investors closer to retirement tend to prefer positive gearing, because cash flow matters more to them than the deduction. Most properties drift from negative to positive over the years anyway, as rents climb and fixed costs like the mortgage don't.
Judge it on total return
Total return is capital growth plus rental yield, minus every cost. You need both sides of the ledger to see it at tax time. Our cash flow projection calculator shows how a property's cash flow moves year by year, so you can see whether it drifts from negative to positive.