In short: A positively geared property earns more rent than it costs to hold, so it adds to your income and you pay tax on the surplus. A negatively geared property costs more than it earns, and the loss reduces your tax. Positive gearing suits investors who want income and borrowing power; negative gearing suits higher earners betting on capital growth who can fund the shortfall.
Neither approach is right or wrong. They are different bets on where your return comes from, and most Melbourne investors end up holding a mix over time as rents rise and loans shrink. This guide sets two real-world examples side by side, shows the tax and cashflow, and explains how each affects your ability to buy the next property.
The three gearing positions
| Position | Meaning | Tax effect |
|---|---|---|
| Negatively geared | Deductible costs exceed rent; you top up from your salary | Loss reduces taxable income; refund at your marginal rate |
| Neutrally geared | Rent roughly equals costs | Little or no tax effect either way |
| Positively geared | Rent exceeds deductible costs | Surplus is added to income and taxed at your marginal rate |
A fourth phrase you will hear is positive cashflow after tax: the property loses money on paper (usually because of depreciation, a non-cash deduction) but the tax refund is larger than the cash shortfall, so it puts money in your pocket. Newer homes in Melbourne's growth corridors sometimes land here.
Two Melbourne properties compared
Both investors are on a 30% marginal rate plus the 2% Medicare levy (32% combined, taxable income between $45,001 and $135,000 in 2026–27). Interest is shown for illustration at 6.00% p.a., interest-only.
| Line | Werribee unit (positively geared) | Greenvale house (negatively geared) |
|---|---|---|
| Purchase price | $450,000 | $750,000 |
| Loan | $250,000 (56% LVR) | $600,000 (80% LVR) |
| Weekly rent | $450 | $560 |
| Annual rent | $23,400 | $29,120 |
| Interest | −$15,000 | −$36,000 |
| Agent fees (7% plus letting) | −$1,638 | −$2,038 |
| Council rates and water | −$2,200 | −$3,100 |
| Insurance | −$400 (building cover via owners corporation) | −$1,600 |
| Owners corporation | −$1,800 | nil |
| Maintenance | −$600 | −$1,800 |
| Land tax (site value $200,000 vs $420,000) | −$975 | −$1,710 |
| Pre-tax cash position | +$787 | −$17,128 |
| Depreciation (non-cash) | −$1,200 | −$5,000 |
| Taxable result | −$413 (small paper loss) | −$22,128 |
| Tax effect at 32% | +$132 refund | +$7,081 refund |
| After-tax cash position | +$919 per year | −$10,047 per year (about $193 per week) |
The Werribee unit is positive because of a low loan balance and a higher yield (5.2% gross). It would be negatively geared at 80% LVR: interest on $360,000 would be $21,600 and the after-tax result about −$4,000. Positive gearing in Melbourne almost always comes from either a large deposit, a property bought years ago, or a high-yield asset such as a unit, a dual-occupancy or a regional house.
The Greenvale house costs $193 a week to hold but is a $750,000 asset with a full-size block. At 4% growth it gains $30,000 a year against a $10,047 cost. At 1% growth it gains $7,500 and the investor is behind. Use the investment property cashflow calculator to test your own figures, and read negative gearing explained for the line-by-line tax mechanics.
Pros and cons
| Positive gearing | Negative gearing | |
|---|---|---|
| Cashflow | Adds income each year | Requires a top-up from salary |
| Tax | Surplus taxed at your marginal rate | Loss reduces tax; the higher your income, the bigger the refund |
| Borrowing power | Improves it: net rent is income | Reduces it: lenders shade rent and test all debt at rate plus 3 points |
| Typical asset | Units, regional houses, dual-income properties, older purchases | Houses in growth suburbs, new builds with depreciation |
| Growth outlook | Often lower | Often higher |
| Risk if rates rise 2% | Usually still neutral or slightly positive | Shortfall grows sharply |
| Risk if vacant | Loses income but rarely creates hardship | Full mortgage still due from salary |
| Best for | Lower incomes, retirees, investors building a portfolio | Higher incomes, long horizons, investors with spare cashflow |
Who each strategy suits
Positive gearing suits you if
- Your income is under about $135,000 and the tax refund from a loss would be modest.
- You want to buy several properties: each positive property adds to borrowing power instead of consuming it.
- You are approaching retirement and need the property to fund itself.
- You would rather have a smaller, reliable return than a larger, uncertain one.
Negative gearing suits you if
- Your marginal rate is 39% or 47% and the refund materially offsets the shortfall.
- You have at least a 10-year horizon and can hold through a flat period.
- Your household has spare monthly cashflow of at least twice the projected shortfall.
- You are buying land-heavy property in a corridor with infrastructure spending, such as Greenvale, Mickleham or Donnybrook.
Many couples split ownership unequally (say 80/20 as tenants in common) so the higher earner claims most of the loss. The investment property guide covers ownership structures.
How lenders see each
This is the part investors overlook. When you apply for the next loan:
- Rental income is shaded. Most lenders count 70–80% of the rent, whether the property is positive or negative.
- All debt is tested at your rate plus 3 percentage points. For illustration, at 6.00% p.a. a $600,000 loan is assessed as if it cost 9.00% p.a., or $54,000 a year in interest, against $23,300 of shaded rent.
- Negative gearing benefits are counted by only some lenders, and then conservatively.
- A positive property with a low loan (like the Werribee unit) shows up as net income and lifts capacity.
The practical effect: a $180,000-income couple might service one negatively geared Greenvale house comfortably but fail serviceability on a second. The same couple with two Werribee-style units would still have capacity for a third. Check your position in the borrowing power calculator.
Turning negative into positive over time
Most negatively geared properties become positive eventually. The levers, roughly in order of impact:
- Rent growth. At 4% a year, the Greenvale rent reaches $36,000 in about six years, matching the interest.
- Paying down principal. Switching to principal and interest reduces the interest bill every year, and usually gets a lower rate.
- An offset account. Cash in an offset against the investment loan reduces interest without reducing the deductible balance if you later withdraw it for another investment. See offset versus redraw.
- Refinancing to a sharper rate. Half a percent on $600,000 is $3,000 a year straight off the shortfall.
- Adding value. A granny flat or a second income stream on a large block in Melbourne's north can lift yield well above the suburb average.
Choosing your strategy: checklist
- Write down your taxable income and the marginal rate that applies under the 2026–27 brackets.
- Decide how much monthly shortfall (if any) you can carry after a 2% rate rise.
- Decide whether income or growth matters more for the next 10 years.
- Model both scenarios in the cashflow calculator with realistic rent, costs and land tax.
- Check how each scenario affects your borrowing power for a second purchase.
- Confirm ownership split and structure with your accountant before signing.
- Set the loan up in its own split so deductibility is clean either way.
Common mistakes
- Assuming positive means profitable. A high-yield property that never grows can underperform a negatively geared house over 15 years.
- Assuming negative means clever. A loss is only useful if the growth exceeds it after tax.
- Ignoring land tax, which turns some marginally positive Melbourne properties negative from year one. See land tax in Victoria explained.
- Forgetting the CGT bill on sale. Both strategies pay capital gains tax on sale, with a 50% discount after 12 months. Read capital gains tax on property.
- Buying the wrong asset for your income. A $40,000 earner negatively gearing a $750,000 house gets little tax relief and a large annual bill.
- Not revisiting the strategy. A property bought negative in Werribee eight years ago may be positive now, and the loan structure should reflect that.
Frequently asked questions
Which is better, positive or negative gearing?
Neither is universally better. Positive gearing gives income and preserves borrowing power; negative gearing gives a tax refund and usually a higher-growth asset at the cost of an annual shortfall. High earners with long horizons tend to favour negative gearing; investors on modest incomes, retirees and portfolio builders favour positive gearing. The right answer depends on your tax rate, cashflow and goals.
Do you pay tax on positively geared property?
Yes. The net rental profit (rent minus deductible expenses including interest and depreciation) is added to your taxable income and taxed at your marginal rate. On a $5,000 net profit at 32% you pay $1,600. Depreciation on a newer property often reduces or removes the taxable profit even when the cashflow is positive.
Can a property be both positively and negatively geared?
Not in the same year, but a property can be cash positive and tax negative at once. Depreciation is a deduction that costs you nothing in cash, so a property with rent slightly above its cash costs can still show a paper loss. Investors call this positive cashflow after tax. Over time most properties move from negative to positive as rent rises and the loan falls.
Is positive gearing good for borrowing capacity?
Yes. A property whose shaded rent (70–80% of the actual rent) exceeds its buffered repayments adds net income to your application. A negatively geared property does the opposite, and only some lenders add back the tax benefit. If your goal is a multi-property portfolio, positive or neutral properties keep the door open for the next purchase.
How do I make my investment property positively geared?
Increase rent to market, reduce the loan through principal repayments or an offset account, refinance to a lower rate, and cut costs such as management fees and insurance. Adding a second dwelling or renting rooms individually lifts yield. On a $600,000 loan, a 0.50% rate cut and a $30 weekly rent rise together improve the position by about $4,560 a year.
What is neutral gearing?
Neutral gearing is when rent roughly equals deductible costs, so the property neither costs you money nor produces taxable income. It is often the goal for investors who want growth without an ongoing shortfall. A property bought negatively geared typically reaches neutral within five to eight years through rent growth and principal reduction, sooner if you refinance to a sharper rate.
Talk to GNT Finance
Whether you are buying a positively geared unit in Werribee or a growth-focused house in Greenvale, GNT Finance structures the investment loan around your gearing strategy and your next purchase. Gorakh Timilsina's years assessing investor files as a senior credit officer mean we know exactly how each lender treats rental income. Book a free consultation or call 0426 403 703; there is no cost to you for our home-loan service in most cases.
This page is general information only and not legal, tax or financial advice. Laws change — confirm current rules with the State Revenue Office, the ATO or a licensed professional.
Written by Gorakh Timilsina
Founder, CEO & Senior Mortgage Consultant at GNT Finance. Gorakh started as a broker assistant, spent years as a senior credit officer assessing loan applications, and now helps Melbourne families get the right loan approved. English, Nepali and Hindi spoken.