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Negative Gearing and Selling Your Investment Property in Brisbane

Many Brisbane investors have been negatively geared for years. As holding costs rise and capital gains compound, the sell-or-hold question looks different than it did a decade ago.

Negative gearing has been the structural rationale for a large proportion of Brisbane investment property purchases over the past twenty years. Buy an inner east property, run it at a modest annual loss, offset those losses against income tax, and bank on capital growth to produce wealth over the long term. For investors who executed this strategy in the 2000s or early 2010s, the capital growth has generally been substantial. The question many are now confronting is whether the strategy still makes sense to continue, or whether the time to realise the gain has arrived.

This article explains how negative gearing works, how to assess when it stops making financial sense, and how the decision to sell interacts with your tax position. It is not tax advice. The numbers are illustrative, and every investor's situation is different, engage a qualified accountant and financial adviser before making decisions.

How negative gearing works

A property is negatively geared when its total annual costs exceed its annual rental income. The annual costs of holding an investment property include: mortgage interest, property management fees (typically 7% to 10% of gross rent), council rates, insurance, landlord insurance, maintenance and repairs, property agent fees, depreciation (a non-cash deduction), and, for many inner east properties now, land tax.

If those combined costs exceed the rental income, the shortfall is a net loss. Under Australian tax law, that net loss can be offset against the investor's other income, typically employment income, reducing the amount of income tax they pay. The higher your marginal tax rate, the more the tax offset is worth. This is why negative gearing has historically been most attractive to higher-income earners, who see the greatest tax benefit from the annual loss.

The implicit assumption in the strategy is that the capital gain over time will outweigh the accumulated annual losses. In Brisbane's inner east, from roughly 2013 to the present, that assumption has proven correct for most investors. A property purchased in Coorparoo for $550,000 in 2013 that is now worth $1.1 million to $1.3 million has generated capital growth that comfortably exceeds even fifteen years of modest annual losses.

When the calculus changes

The hold-or-sell decision is not static. Several factors have shifted it for a meaningful number of Brisbane investors in recent years.

Interest rates rose sharply from 2022 and remain elevated compared to the historic lows of 2020-21. For investors who had loan balances of $600,000 or more, moving from a 2% to a 6% interest rate added $24,000 per year in interest costs, a substantial increase in the annual loss. The tax offset does not cover this in full, particularly for investors in lower marginal tax brackets.

Land values in Brisbane's inner east have increased substantially, which raises land tax for investors who are above the threshold. An investment property that was just below the land tax threshold a few years ago may now be generating an annual land tax bill of $2,000 to $6,000 that did not exist when the property was purchased. This is a step-change in holding costs that is easy to underestimate.

Rental yields have not kept pace with property values. A property purchased for $600,000 in 2015 at a 4.5% gross yield was returning $27,000 per year in rent. If the same property is now worth $1.1 million but the rent has increased to $40,000, the gross yield is now 3.6%. The absolute rental income is higher, but as a proportion of the property's value, and relative to the cost of borrowed money, it is lower.

What the sell-or-hold analysis actually involves

The relevant question is not "is this property negatively geared?" but "what is the total expected return from continuing to hold versus selling now, on an after-tax basis?" These are very different questions.

Continuing to hold involves: annual net cash outflows (the negative gearing shortfall after tax offset), ongoing capital growth (which may be slower from current elevated levels than it was from 2013-2020), and accumulating land tax, insurance, and maintenance costs. Selling involves: realising the capital gain (and paying CGT on 50% of the gain above the cost base, at your marginal rate), receiving the net proceeds, and deploying that capital elsewhere, into superannuation, a higher-yielding asset, or debt reduction.

For long-term holders with large accumulated gains, the CGT on sale is substantial. On a property purchased for $600,000 and sold for $1.2 million, the gain is $600,000. With the 50% discount for assets held over 12 months, the taxable gain is $300,000. At a 45% marginal rate, the CGT bill is $135,000. This is real money that needs to be factored into the decision.

But it is worth framing this correctly. The CGT is not a reason to avoid selling if the sell-or-hold analysis otherwise supports it. It is a cost to factor in, alongside the opportunity cost of continuing to hold an asset that generates an annual loss at an elevated holding cost. Some investors defer selling to defer the CGT, which is reasonable if holding is otherwise financially justified. Deferring CGT as the primary reason to hold an investment that is no longer meeting your return requirements is different.

Settlement timing and tax years

When you sell an investment property in Australia, the capital gain is recognised in the financial year in which the contract is signed, not the settlement date, in most circumstances. If your contract exchanges in late June, the gain falls in the current financial year. If it exchanges in early July, it falls in the next financial year. This distinction can be worth tens of thousands of dollars in deferred tax, depending on your income in each year.

Your accountant can model the tax impact of selling in each financial year and advise on whether timing the settlement around 30 June is worthwhile given your specific income and tax position. This is one of the most frequently valuable planning conversations an investor can have before listing a property for sale.