Negative gearing maths for Victorian investors in 2025

Negative gearing, the well-understood mechanism of using a cash loss on an investment property to offset other taxable income, certainly remains a fixture in the landscape of Victorian investor economics. However, to simply view it as "intact" without dissecting its current impact would be to paint an incomplete picture. The raw size of the tax benefit has, without a doubt, seen a significant compression since earlier periods like 2018 or 2019, fundamentally altering the after-tax equation for property investors in Melbourne and regional Victoria. The days of what some might recall as substantial, easy tax windfalls are largely behind us, replaced by a more nuanced calculation where careful planning and realistic expectations are paramount.

Let's illustrate this with an updated scenario, grounded in the realities of the Victorian property market here in mid-2025. Consider an $850,000 purchase in a middle-ring Melbourne suburb - perhaps something in Reservoir, Sunshine West, or even a smaller unit in Preston. This isn’t a speculative, fringe investment, but a typical entry point for many suburban investors seeking established infrastructure and reasonable potential for growth. We’ll assume an annual rental income of $34,000, which equates to roughly $654 per week, a figure that’s increasingly common for a well-maintained three-bedroom home in these areas. For financing, a relatively common 80% Loan to Value Ratio (LVR) means a mortgage of $680,000. Interest rates, whilst having seen some recent fluctuations, are sitting around 6.39% for a typical investment loan. This translates to a hefty annual interest payment of approximately $43,450. On top of that, holding costs are a reality: annual council and water rates might total around $3,200, insurance adds another $1,800 annually, and property management, especially for a proactive service, could factor in at 7.5% of gross rent, so about $2,400. Factoring in some minor repairs and maintenance, let’s add another $1,500, bringing total non-interest holding costs to $8,900.

So, the raw numbers for income and outgoings before considering any tax deductions are: a gross annual income of $34,000 against total annual cash outgoings of roughly $52,350 (interest at $43,450 plus other holding costs at $8,900). This immediately yields a pre-depreciation cash loss on the property of around $18,350. This figure highlights the immediate cash outflow investors are facing before any tax considerations even come into play. It’s a substantial gap that needs to be bridged by either other income or, as we explore here, tax efficiencies.

Now, for the magic of depreciation. Even for well-established properties, there are still avenues to claim. For instance, on a property built around 2010, an investor could realistically expect to claim somewhere in the region of $8,000 to $10,000 in year one. This would typically comprise a building allowance (capital works deductions) and possibly some plant and equipment depreciation, depending on what fixtures and fittings are original to the purchase or if new items were installed post-purchase. Taking a mid-range figure of $9,000 for depreciation in our example, this reduces our cash loss to a total taxable loss of $27,350. This is the figure the Australian Taxation Office (ATO) allows us to deduct from other income sources.

The impact of this deduction is, of course, entirely dependent on the investor's marginal tax rate. For many active investors, especially those with other income streams, a marginal tax rate of 39% (which includes the Medicare levy) is a reasonable and often conservative estimation. Applying this rate to our total taxable loss of $27,350 yields a tax benefit of approximately $10,666.50. This is the amount by which their annual tax bill on other income is reduced thanks to negative gearing.

Subtracting this tax benefit from our initial pre-tax cash loss, the after-tax cash cost to hold the property becomes approximately $7,683.50 per year. To put that into more digestible terms, it translates to an out-of-pocket cost of roughly $147.76 per week. This figure is the true weekly drain on an investor's cash flow in the current climate for a property matching our scenario. It's not insignificant, and it underscores the shift from previous years where the weekly cash cost for a comparably priced property might have been closer to $50-$80. The days of near-neutral cash flow or even positive cash flow after tax, purely from negative gearing on a standalone property like this, are far less common now unless the property was acquired at a much lower price point or with a significantly lower interest rate.

This fundamental arithmetic leads us to the crucial question: what does an investor actually need to achieve in terms of capital growth to make this investment worthwhile? With a weekly holding cost of around $148, an investor needs to be supremely confident that the underlying asset's value will appreciate sufficiently to not only cover these recurring out-of-pocket expenses but also a raft of other significant costs. These include the substantial upfront stamp duty in Victoria (which for an $850,000 purchase could be around $46,750), legal fees, building inspections, and other transaction costs involved in both acquisition and eventual disposal. Furthermore, the elephant in the room for any profitable investment is the capital gains tax (CGT) bill that will eventually arise upon sale, which will eat into a portion of any realised profit.

To simply break even on the holding costs and the various transactional expenses over, say, a five to seven-year hold period for our $850,000 property, a back-of-the-envelope calculation suggests that an investor would need an annual compound capital growth rate in the range of 2.8% to 3.5%, net of inflation. This isn't an astronomical figure, and it's certainly achievable in many Melbourne suburbs over the medium to long term, especially in established middle-ring areas with good infrastructure and amenity. However, it's critically important to acknowledge that this growth is *not automatic*. The market ebbs and flows, and past performance is never a guarantee of future returns. A 3% annual compound growth on an $850,000 property means an increase of roughly $25,500 in year one alone. When you compare this to the $7,683.50 annual after-tax cash loss, it's clear the bulk of the profit lies in capital appreciation.

This current reality necessitates a very different mindset from investors compared to say, five years ago. Investing in Victorian property under present negative gearing conditions is far less about generating immediate tax refunds to offset a minor cash outflow, and much more about a strategic play on long-term capital appreciation. It's a calculated gamble on future market growth, with the negative gearing mechanism now acting more as a marginal relief valve rather than a primary driver of profitability. Investors are essentially funding a portion of their holding costs and hoping the market does the heavy lifting.

Therefore, the due diligence required has intensified. Simply buying "any" investment property and expecting negative gearing to salvage the deal is a recipe for disappointment. Investors must meticulously research specific suburbs and property types, understanding their unique growth drivers. For instance, a two-bedroom apartment near a major hospital in Footscray or Heidelberg might have a different long-term growth trajectory and rental demand profile compared to a larger family home in Officer or Geelong. They must also have a clear financial capacity to comfortably absorb that $148 per week cash outflow, year in and year out, potentially for several years, without becoming overly reliant on immediate tax offsets.

Furthermore, the nuances of depreciation schedules are becoming more important. Engaging with a specialist quantity surveyor to maximise legitimate depreciation claims, particularly on newer builds or properties with recent renovations, can meaningfully improve the after-tax cash flow. Even marginal gains in the depreciation claim can reduce that weekly after-tax cost and improve the overall investment viability. For an older property, understanding what plant and equipment items can still be claimed, and for how long, is vital.

Ultimately, the headline arithmetic of negative gearing in Victoria in 2025 points to a more mature and demanding investment environment. It remains a tool, but its effectiveness has been scaled back, demanding a more robust fundamental investment case. The reliance on substantial capital growth to justify the acquisition is paramount. Before embarking on any investment decision, it is absolutely critical for Victorian investors to go beyond the generalised scenarios and run their own specific numbers, diligently verified with their accountant and financial advisor. The days of simply assuming a positive outcome from negative gearing are over. Each investment must stand on its own two feet, with negative gearing playing a supportive, rather than leading, role in the overall financial strategy. A detailed cash flow analysis, a realistic capital growth forecast for the specific asset and location, and a thorough understanding of one's personal tax situation are indispensable. Without this rigorous approach, an investor risks finding themselves with a property that is less an asset building wealth and more a persistent drain on their financial resources here in Melbourne.