Negative gearing — the ability to deduct rental property losses against other income — is one of the most debated tax policies in Australia. It is simultaneously defended as a legitimate investment incentive and attacked as a subsidy that inflates house prices and squeezes out first-home buyers. Here is what the economics actually says.

How Negative Gearing Works

When an investor's rental income is less than their property expenses (mortgage interest, maintenance, rates, and depreciation), the resulting "loss" can be deducted against their salary or other income, reducing their tax liability. Combined with the 50 per cent capital gains tax discount available on assets held longer than 12 months, this creates a powerful incentive to hold investment property even when it generates a cash loss — because the anticipated capital gain makes the overall position profitable.

The Case For

Proponents argue that negative gearing increases the supply of rental properties by making investment more attractive, and that removing it would cause investors to exit the market, reducing rental stock and pushing rents higher. The 1985 experiment under the Hawke government — when negative gearing was briefly quarantined — is often cited as evidence, though economists dispute its relevance to current market conditions.

The Case Against

Critics point to research by the Grattan Institute and others showing that negative gearing predominantly benefits existing investors on high incomes, stimulates demand for established dwellings rather than new construction (because the capital gain is where the money is made), and thus contributes to price inflation without meaningfully expanding supply. The OECD has repeatedly recommended that Australia reform the policy.