Negative Gearing: Why It’s Not An Investment Strategy

Negative gearing is one of the most misunderstood concepts in Australian investing. For years, it has been promoted as if it were a property investment strategy in itself, when in truth, it is nothing more than a tax offset tool.

The problem is that too many investors lean on it as a shortcut, confusing a tax deduction with a pathway to building lasting wealth.

Yes, negative gearing can offer short-term relief by reducing taxable income. But relying on it without a broader investment plan creates a cash flow drain that often locks investors into one or two properties and leaves them stuck.

Rising interest rates have made this risk more visible than ever, with many portfolios weighed down by losses disguised as savings.

Kev Tran Group has seen how this misconception stalls growth. Our philosophy, shaped by years of applying due diligence and data-backed planning, is that real success comes from balancing capital growth with sustainable income.

For investors who want to scale, the focus should be on building a portfolio that delivers strong returns rather than chasing tax benefits.

In this article, we unpack what negative gearing actually means, why the risks outweigh the perceived benefits, and what smarter investors are doing to grow portfolios with clarity and confidence.

What Is Negative Gearing?

Negative gearing occurs when rental income is lower than the property’s holding costs, such as mortgage repayments, insurance, and maintenance. Investors then claim the loss against their taxable income. It sounds attractive, but what it really means is spending a dollar to save cents.

Take a simple case. A property that runs at a $5,000 annual loss might return roughly $1,600 in tax savings. That still leaves the investor down $3,400 each year. The numbers don’t lie: this is a cash drain disguised as a benefit.

Kev Tran Group has seen how quickly this misconception stalls portfolios. Instead of freeing investors to buy more properties, it erodes serviceability and locks them in place.

Our belief is that wealth is created through strong assets and sustainable cash flow, not by leaning on a tax offset. Negative gearing explained properly is simple: it’s a tax tool, not an investment strategy.

The Cold Facts

Negative gearing is often painted as a clever way to get ahead, but the reality is harsher than most realise. It depends on the assumption that future capital growth will be strong enough to outweigh years of consistent cash losses.

That reliance on a future outcome makes it speculation rather than a considered property investment strategy in Australia.

Each year an investor relies on negative gearing, they are actively draining income to prop up the asset. The shortfall does not disappear; it is covered from wages or savings, which reduces household stability.

When interest rates move higher, the losses magnify quickly, placing additional pressure on families who thought they were building wealth.

The risks of negative gearing become obvious when borrowing capacity stalls. Lenders assess cash flow, buffers, and repayment history, and an investor stretched by losses finds themselves locked out of further opportunities.

This is why so many remain stuck with only one or two properties, even when they originally planned for more. Finance mistakes erode both financial confidence and portfolio growth potential.

The Tax Illusion: Deductions Don’t Equal Profit

Many investors confuse reducing taxable income with making money. Negative gearing explained in Australia is simple: you record a loss, claim that loss as a deduction, and receive a smaller tax bill.

The catch is that the tax benefits of negative gearing do not erase the fact that your property is still running at a loss.

Capital gains tax is often presented as the offsetting factor. Investors argue that future growth will cover today’s losses, especially because of the 50% CGT discount when a property is held for more than 12 months.

The problem is that this future benefit remains uncertain. Property values do not rise in a straight line, and relying on capital growth to justify years of negative cash flow is a gamble, not a structured property investment strategy in Australia.

In practice, the distribution of tax benefits is uneven. High-income earners are the group that gains the most, because their higher marginal tax rates translate to bigger deductions.

A professional household on $360,000 + might see a meaningful reduction in tax, while a middle-income family may only see a small return that fails to offset their out-of-pocket losses.

This explains why many average investors fall behind while the wealthiest use the system to their advantage.

Who Really Wins from Negative Gearing?

The distribution of benefits from negative gearing is heavily skewed. Investors earning more than $180,000 a year claimed roughly $1.3 billion in deductions in 2021–22 alone.

This makes the system far more advantageous to the top end of the income scale than to the everyday investor.

Middle-income households experience a different reality. Their lower tax rates mean smaller deductions, while they still shoulder the full impact of ongoing cashflow losses.

In contrast, high earners receive larger offsets, so the structure amplifies wealth for those already ahead.

There is also a cost to the broader economy. Government revenue falls by an estimated $11–12 billion each year as a result of negative gearing concessions.

That shortfall affects funding for services and infrastructure, placing the burden back on taxpayers who may never benefit from the policy.

Property markets feel the pressure too. By incentivising investors to chase deductions, demand for housing increases, which pushes up prices in already competitive areas.

This intensifies affordability challenges for first-home buyers and adds to structural imbalances in supply and demand.

What the Market and Policymakers Say

Negative gearing has been at the centre of housing and tax debates for decades. Every few years, it resurfaces as a political flashpoint, often in the lead-up to elections.

Key milestones show how reform has been proposed, resisted, and ultimately shelved:

• Labor reforms: Both the 2016 and 2019 federal election campaigns included policies to restrict negative gearing to newly built homes and reduce the capital gains tax discount. The argument was that these changes would level the playing field for first-home buyers and reduce the fiscal cost of the concessions.
  
  
• Greens’ advocacy: The Greens have consistently argued for caps or broader limits, maintaining that negative gearing is a regressive policy that benefits the wealthy while worsening affordability for others.
  
  
• Treasury costings: Official figures estimate that negative gearing, combined with the CGT discount, drains $11–12 billion from government revenue each year. This places it among the most expensive tax expenditures in Australia, prompting questions about whether the cost is justified.
  

Despite strong arguments for reform, successive governments have pulled back from changes. The main reasons are clear:

• Political risk: More than two million Australians use negative gearing. Any attempt to scale it back risks alienating a large group of voters who see it as part of their investment plan.
  
  
• Affordability debate: Critics of reform argue that changes could reduce investor participation, slow construction, and place upward pressure on rents. Reform advocates counter that maintaining the policy inflates demand, drives property prices higher, and creates further barriers for first-home buyers.
  

This divide has left negative gearing untouched, even as affordability issues worsen and government budgets tighten.

For investors, the message is straightforward. Negative gearing is not locked in forever. Policies shift with political priorities and fiscal pressures, and what exists today can be rewritten quickly.

Building a property portfolio on the assumption that tax benefits will always remain is risky. The smarter path is to prioritise strong assets, sustainable cashflow, and diversified markets, elements that hold their value regardless of policy settings.

Why Strategy Beats Tax Tricks Every Time

Tax concessions may ease short-term pain, but they do not build wealth. When portfolios rely on negative gearing, they remain vulnerable because the entire plan hinges on government policy. 

A stronger approach is one built on strategy, where growth and cash flow work together to create stability and expansion.

This is why we focus on balance. We target established houses in markets supported by diversified economies, where employment spreads across healthcare, education, retail, and infrastructure rather than one volatile industry.

Properties in these areas are less exposed to sudden downturns, while yields above 4.5% provide enough income to keep serviceability intact.

As a result, investors can continue adding properties instead of being forced to stop after one or two purchases.

The right property is also filtered through strict due diligence. We rule out locations prone to floods or bushfires, as well as areas with public housing concentrations above 20%.

Smaller but critical detractors, such as busy roads, irregular block shapes, or nearby power infrastructure, are also excluded.

Each of these checks matters because overlooked risks today often become valuation problems or tenant issues tomorrow. To learn more about how we apply this process, visit our Kev Tran Group website.

What this shows is that tax offsets cannot substitute for strategy. A deduction reduces a portion of a loss, yet it never produces long-term gains. When investors choose well-located, cashflow-sound assets that meet rigorous criteria, each purchase supports the next.

This compounding effect is what allows portfolios to grow steadily, regardless of political debates over negative gearing. For ongoing insights and examples, you can also follow us on Instagram or connect via Facebook.

Smarter Alternatives for Investors

A strong portfolio begins with properties that hold their own financially from day one. When rental income covers costs, investors are free to grow without being weighed down by persistent losses.

Positive or neutral cash flow provides breathing space while capital growth compounds in the background.

Markets with depth and diversity often deliver the most reliable results. Areas anchored by multiple industries, expanding transport networks, and improving amenities typically attract stable populations and long-term demand.

These factors work together to create both rental security and price resilience, which are crucial for sustained portfolio expansion.

Before recommending any property, we apply detailed modelling to test its resilience. Serviceability reviews confirm that lenders will support future acquisitions.

Stress testing against interest rate rises or temporary vacancies highlights whether the numbers still hold. Using conservative inputs ensures that clients are building with confidence rather than chasing projections that may never eventuate.

One practical example is how we’ve helped investors avoid plateauing after their first purchases. Rather than buying assets that erode monthly income, they acquired homes that immediately contributed to the overall portfolio.

Because these properties strengthened their financial position, lenders were open to funding additional acquisitions, keeping their momentum intact.

This kind of discipline creates a compounding effect across an entire portfolio. Each property becomes a stepping stone to the next, rather than a barrier that blocks progress.

For investors who want lasting results, the smarter choice is to prioritise assets that balance steady income with enduring growth.

Choose Strategy Over Shortcuts

The message is clear: negative gearing is a tactic, not a plan. If your portfolio is built on tax offsets, you are gambling with both your future and your ability to keep investing. Smarter property investment strategies in Australia focus on quality, balance, and resilience.

Book your clarity call today with Kev Tran Group. Let’s map out a portfolio that doesn’t rely on tax tricks, but builds lasting wealth.