The controversial history of negative gearing
By Ryan Johnson
As the saying goes, there are three certainties in life - death, taxes, and endless debates about negative gearing.
For decades, watercoolers across Australia have heard the arguments, but the conversation is bubbling again with renewed intensity as the nation faces a housing crisis.
With rental shortages, skyrocketing property prices, and Labor hinting at changes, negative gearing is back in the spotlight, igniting fierce opinions from all sides.
But what exactly is it and why does it matter?
Let's break down this investor-friendly policy fueling Australia's housing debate.
What is negative gearing?
You won't find the term 'negative gearing' in the fine print of Australian tax laws.
Instead, it's a common term used to describe a situation where the costs associated with an asset - like property - outweigh the income it generates.
In contrast, positive gearing happens when income exceeds costs and the investor is making a profit from day one without waiting for the investment to grow.
While negative gearing isn't exclusive to real estate - it applies to shares, managed funds, art, and even wine - it has become almost synonymous with property investment.
But why has it become so closely linked with the housing market?
How negative gearing works in property
In property investing, negative gearing occurs when rental income doesn't cover the costs of owning or managing the property.
Investing in Australian real estate is expensive. If investments were horse breeds, property would be a show pony: high-maintenance, costly, and requiring constant attention.
Just like a show pony needs grooming, premium food, and a handler to keep it competition-ready, property ownership comes with its own expenses like mortgage interest, repairs, rates, and insurance.
So why do property investors stick with it? It's about playing the long game.
Investors often accept short-term losses with the expectation that the property's value will appreciate over time.
However, just like a pony show, investing in property demands deep pockets.
Not everyone is cut out for the pink pony club, and not everyone is prepared for the financial commitment required to ride out the expenses for long-term capital gains.
Negative gearing as a tax strategy
At the heart of Australia's housing debate lies a key issue: How investors are incentivised to use negative gearing as a tax strategy.
Under the current arrangement, if the costs of a rental property exceed the income it generates, investors can deduct that loss from their taxable income.
For instance, if your rental property costs $10,000 more than it brings in, your taxable income is reduced by the same amount.
Another major factor is the capital gains tax discount, introduced in 1999.
This allows property investors to pay tax on only 50% of their capital gain when they sell an investment property, as long as they've owned it for more than a year.
According to tax expert Mark Chapman from H&R Block, this combination makes negative gearing a "very attractive" tax strategy for property investors.
The history of negative gearing
Negative gearing has a long history in Australia. It was introduced in 1936 to encourage housing investment and increase supply, but it has been the subject of political debate ever since.
Past attempts to reform the policy have produced mixed results.
In 1985, the Hawke government limited negative gearing by stopping investors from using rental losses to offset income.
However, this decision was reversed just two years later after housing shortages and rising rents.
More recently, Labor attempted to curtail the policy during the 2016 and 2019 federal elections, proposing that the tax benefits should only apply to new housing.
This responded to criticisms that the policy incentivised buying existing homes, rather than building new ones, which does little to alleviate housing shortages.
Recently, this argument has picked up new weight, with the Grattan Institute releasing figures that show just 18% of the $122 billion lent to housing investors between July 2023 and July 2024 was for the construction of newly built dwellings.
Despite this, Labor lost both elections, and the debate over negative gearing subsided - until now.
The current housing crisis
Australia is currently facing its worst housing affordability crisis on record.
According to PropTrack, a median-income household earning over $112,000 per year can now afford 14% of homes across the country. Three years ago, this figure was 43% of homes.

This crisis was partly driven by record-low interest rates during the pandemic, sparking demand.
CoreLogic data showed national property prices increased by over $223,000 (38.3%) between March 2020 and September 2024.
During this time, the official cash rate climbed from its lowest point to its highest rate since 2011.

Equally, the demand for rentals went up, with national vacancy rates hitting its lowest point (0.7%) in February.
House rents (48%) and unit rents (40%) have soared since March 2020, outpacing wage growth of just 13% over the same period, according to the Australian Financial Review using Domain figures.
While increasing housing supply is the most obvious solution, it's easier said than done.
The government has aimed to build 1.2 million new homes over five years, but labour shortages and inflation have already delayed progress.
Property prices remain eye-watering - great news for investors enjoying discounted capital gains but disheartening for first homebuyers struggling to enter the market.
A continued debate
In this climate, the calls for reform grow louder. Critics argue that negative gearing exacerbates housing affordability issues, driving up prices and locking first-time buyers out of the market.
In September, the Grattan Institute called on the government to curb negative gearing and reduce the capital gains discount, which could inject $7 billion in tax revenue into the federal budget each year.
However, the Property Council of Australia maintains that increasing the housing supply should be the government's main priority. It argues that changes to negative gearing could shrink the housing supply further, worsening the crisis.
Others have predicted the ramifications if negative gearing were to change. Dale Gillham, chief investment analyst at Wealth Within Institute, said removing the policy would likely cause a "seismic shift in investor behaviour".
Whichever path the government chooses, the debate over negative gearing is far from over.
Get stories like this in our newsletters.