The following is NOT TAX ADVICE. We are not accountants. This content is for educational purposes only; intended to provide a better understanding and help you ask more informed questions. You should consult YOUR INVESTMENT-SAVVY ACCOUNTANT about the pros and cons for your unique circumstances.

Introduction

Property investment remains one of Australia’s most popular wealth-building strategies, but understanding the financial mechanics behind your investment is crucial for success. While most investors are familiar with the basic concepts of negative, neutral, and positive gearing, there are actually five distinct gearing scenarios that can significantly impact your investment outcomes.

This comprehensive guide explores these five gearing types, helping you understand not just whether your property is negatively or positively geared from a tax perspective, but also how cash flow considerations create important distinctions within these categories.

Understanding the Basics: What is Property Gearing?

Before diving into the five specific types, let’s clarify what property gearing means in the Australian context.

Gearing refers to the relationship between the rental income your property generates and the expenses associated with owning it. These expenses include mortgage interest, council rates, insurance, maintenance, management fees, and depreciation.

The traditional classifications include:

•Negative gearing: When your property expenses exceed your rental income

•Neutral gearing: When your property expenses roughly equal your rental income

•Positive gearing: When your rental income exceeds your property expenses

However, this simplified view doesn’t account for important distinctions in cash flow and the impact of non-cash deductions like depreciation. Let’s explore the five more nuanced categories that provide a clearer picture of property investment scenarios.

Type 1: Negative Geared and Cash Flow Negative

This is the most commonly understood form of negative gearing and represents many investors’ entry point into the property market.

Key Characteristics:

•Property expenses significantly exceed rental income

•Investor must contribute additional funds monthly to cover the shortfall

•Creates a tax loss that can be offset against other income

•Typically relies heavily on capital growth for overall returns

Example:

A Brisbane investment property purchased for $750,000 generates $550 weekly rent ($28,600 annually) but has annual expenses of $42,000 (including $36,000 in mortgage interest, $2,000 in council rates, $1,500 in insurance, and $2,500 in maintenance and management fees).

The property also provides $4,000 per year in depreciation benefits. Depreciation is a “paper loss” that doesn’t impact your actual cash flow – it’s a tax deduction for the theoretical decline in value of the building and fixtures.

Cash Flow Impact:

•Annual rental income: $28,600

•Annual expenses: $42,000

•Cash shortfall: $13,400 (this is real money you must contribute)

Tax Impact for $150,000 Income Earner:

•Total tax loss: $17,400 ($13,400 cash loss + $4,000 depreciation)

•Tax benefit at 37% marginal rate: $6,438

•**Net out-of-pocket cost: $6,962 (13,400 – $6,438)

This scenario demonstrates how even with significant tax benefits, the investor still faces a substantial annual cash contribution requirement.

Best Suited For:

•High-income earners who can benefit from tax deductions

•Investors focused primarily on capital growth

•Those with sufficient surplus income to cover the ongoing shortfall

•Younger investors with longer investment timeframes

Type 2: Negative Geared but Cash Flow Neutral

This more sophisticated scenario represents a “sweet spot” for many investors, where the property doesn’t drain monthly finances but still provides tax benefits.

Key Characteristics:

•Cash flow neutral or slightly positive before accounting for depreciation

•Becomes negatively geared after including depreciation deductions

•Creates a “paper loss” for tax purposes without requiring additional monthly contributions

•Often occurs in properties owned for several years where rents have increased and loans have been paid down

Example:

A house in Ipswich (within the 4-hour ring of Brisbane) was purchased 4 years ago for $420,000 and now generates $480 weekly rent ($24,960 annually). The investor has paid down some of the loan principal, and rents have increased steadily over the ownership period.

Annual expenses include $22,000 in mortgage interest (reduced from the original amount due to principal repayments), $2,900 in council rates, $1,200 in insurance, and $2,400 in maintenance and management fees, totalling $28,500.

The property still qualifies for $9,000 in depreciation deductions. Remember, depreciation is a “paper loss” – it doesn’t affect your actual cash flow but provides valuable tax deductions.

Cash Flow Impact:

•Annual rental income: $24,960

•Annual expenses: $28,500

•Cash shortfall: -$3,540 (small loss in cash flow)

Tax Impact for $150,000 Income Earner:

•Cash loss before depreciation: -$3,540

•Less depreciation: $9,000

•Total tax loss: $12,540

•Tax benefit at 37% marginal rate: $4,891

•**Net annual benefit: $1,351** (-$3,540 + $4,891)

This scenario represents a property transitioning from Type 1 to a more favourable position as the loan is paid down and rental income increases over time.

Best Suited For:

•Investors seeking tax benefits without ongoing cash drain

•Those building a portfolio who need to maintain serviceability

•Investors who have owned properties for several years

•Strategic investors balancing growth and cash flow considerations

Type 3: Positive Geared but Cash Flow Negative

This often-overlooked category highlights the important distinction between tax position and actual cash flow when principal loan repayments are considered.

Key Characteristics:

•Profitable after all costs and depreciation (from a tax perspective)

•Still requires additional contributions for principal loan repayments

•Principal repayments build equity but aren’t tax-deductible

•Common in properties with good rental yield but significant loans

Example:

A regional Queensland property purchased for $420,000 generates $580 weekly rent ($30,160 annually). Annual expenses include $16,000 in mortgage interest, $1,600 in council rates, $1,200 in insurance, and $2,000 in maintenance and management fees, totalling $20,800.

The property has $3,000 in annual depreciation benefits. Depreciation is a “paper loss” that reduces taxable income without affecting actual cash flow.

Cash Flow Impact:

•Annual rental income: $30,160

•Annual expenses: $20,800

•Principal repayments: $12,000

•**Cash shortfall: $2,640∗∗ ($30,160 – $20,800 – $12,000)

Tax Impact for $150,000 Income Earner:

•Cash profit before depreciation: $9,360

•Less depreciation: $3,000

•Taxable profit: $6,360

•Additional tax at 37% marginal rate: $2,353

•**Net out-of-pocket cost: $4,993∗∗ ($2,640 + $2,353)

This scenario demonstrates how a property can be positively geared for tax purposes (creating taxable income) while still requiring cash contributions due to principal loan repayments.

Best Suited For:

•Investors focused on building equity through forced savings

•Those with sufficient income to cover principal repayments

•Investors in a lower tax bracket where negative gearing benefits are limited

•Those with a medium-term strategy to transition to full positive cash flow

Type 4: Neutral Geared and Cash Flow Neutral

This balanced position represents a transitional phase for many properties as they move from negative to positive gearing.

Key Characteristics:

•Break-even position both before and after depreciation

•No additional contributions required

•Limited tax benefits

•Often occurs as rents increase or loans are paid down

Example:

A Brisbane investment property purchased several years ago for $500,000 now generates $520 weekly rent ($27,040 annually). Annual expenses include $21,000 in mortgage interest, $2,000 in council rates, $1,500 in insurance, and $2,500 in maintenance and management fees, totalling $27,000.

The property has $2,000 in annual depreciation benefits remaining. Depreciation is a “paper loss” that doesn’t impact cash flow but affects the tax position.

Cash Flow Impact:

•Annual rental income: $27,040

•Annual expenses: $27,000

•Cash surplus: $40 (virtually neutral)

Tax Impact for $150,000 Income Earner:

•Cash profit before depreciation: $40

•Less depreciation: $2,000

•Tax loss: $1,960

•Tax benefit at 37% marginal rate: $725

•**Net annual benefit: $765∗∗ (40 + $725)

However, when factoring in miscellaneous expenses like occasional repairs and vacancy periods (averaging around $800annually), the property settles at a near perfect neutral position of approximately − $35 per year.

Principal repayments are minimal as the investor has an interest-only loan, which helps maintain this delicate balance.

Best Suited For:

•Investors transitioning between growth and income phases

•Those seeking to maintain maximum borrowing capacity

•Investors preparing to leverage equity for additional purchases

•Risk-averse investors seeking stability

Type 5: Positive Geared and Cash Flow Positive

This represents the ultimate goal for many property investors, particularly those approaching or in retirement.

Key Characteristics:

•Profitable after all costs, depreciation, and principal repayments

•Generates surplus cash flow that can supplement income

•Creates taxable income

•Often achieved through long-term holding, debt reduction, or purchasing in high-yield areas

Example:

A Brisbane investment property purchased 15 years ago for $320,000 now generates $620 weekly rent ($32,240 annually). The loan has been significantly paid down, with annual expenses including $8,000 in mortgage interest, $2,200 in council rates, $1,800 in insurance, and $3,000 in maintenance and management fees, totalling $15,000.

The property still has $2,000 in annual depreciation benefits remaining. Depreciation is a “paper loss” that reduces taxable income without affecting actual cash flow.

Cash Flow Impact:

•Annual rental income: $32,240

•Annual expenses: $15,000

•Principal repayments: $6,000

•Cash surplus: $11,240

Tax Impact for $150,000 Income Earner:

•Cash profit before depreciation: $17,240

•Less depreciation: $2,000

•Taxable profit: $15,240

•Additional tax at 37% marginal rate: $5,639

•**Net annual cash benefit: $ 5,601∗∗ ($11,240 – $5,639)

This scenario represents the ideal end goal for many property investors – a property that generates substantial positive cash flow even after tax and all expenses.

Best Suited For:

•Investors approaching or in retirement needing income

•Those seeking to reduce investment risk

•Investors who have held properties long-term

•Those who have targeted high-yield areas or added value through renovation

Strategic Considerations for Brisbane Property Investors

Market Positioning

Brisbane’s property market primarily offers opportunities in Types 1 and 2 gearing scenarios within the city and middle-ring suburbs due to higher purchase prices relative to rental returns. Inner-city apartments and houses in middle-ring suburbs typically fall into these categories.

Properties achieving Types 3 and 4 gearing status are more commonly found in areas within the 4-hour ring of Brisbane but outside the immediate Brisbane market, such as Ipswich, Logan, Moreton Bay, and parts of the Gold Coast and Sunshine Coast hinterlands. These areas often provide better rental yields relative to purchase prices.

Type 5 properties in the Brisbane region are typically those held long-term where significant equity has built up and loans have been substantially paid down, or in specific high-yield pockets in outer regions where purchase prices remain moderate relative to rental returns.

Interest Rate Sensitivity

Understanding your gearing type helps assess interest rate sensitivity. Type 1 properties are most vulnerable to rate increases, while Type 5 properties offer the greatest buffer. Brisbane investors should stress-test their portfolios against potential rate movements.

Portfolio Balance

A balanced property portfolio might include properties across different gearing types. Early-career investors might focus on Types 1 and 2 for growth and tax benefits, while adding Types 4 and 5 as they approach retirement.

Transition Strategies

Properties naturally transition between gearing types over time as loans are paid down and rents increase. Strategic investors can accelerate these transitions through:

•Debt reduction strategies

•Value-adding renovations

•Rent optimisation

•Loan restructuring

Conclusion: Beyond Simple Classifications

Understanding these five gearing types provides a more sophisticated framework for property investment decisions than the traditional negative/neutral/positive classifications. By considering both tax position and cash flow impacts, investors can make more informed choices aligned with their financial goals and circumstances.

For Brisbane property investors, the city’s strong growth prospects combined with relatively affordable entry points create opportunities across all five gearing types. The key is matching your investment strategy to your financial situation, risk tolerance, and long-term objectives.

Whether you’re seeking aggressive growth through Type 1 properties, tax efficiency through Type 2, equity building through Type 3, stability through Type 4, or income through Type 5, understanding these nuanced classifications will help you build a more effective property investment strategy.

The above blog is for educational purposes only; intended to provide a better understanding and help you ask more informed questions. The educational examples have used a single person on $150,000 in the 2025 to 2026 financial year. You need to consult YOUR INVESTMENT-SAVVY ACCOUNTANT about the pros and cons for your unique circumstances and what the above would look like for you.

Disclaimer: This article provides general information only and does not constitute financial advice. Property investment carries inherent risks, and investors should seek professional financial advice tailored to their individual circumstances before making investment decisions.