POSITIVE GEARING VS NEGATIVE GEARING

Positive gearing vs negative gearing is one of the first strategic choices every property investor makes, whether they realise it or not. The property you buy, your deposit, and how you finance it all push you toward one or the other. This guide explains what each means for your tax position in New Zealand today. It also corrects a common misunderstanding about negative gearing’s “tax benefits” since the ring-fencing rules arrived.

30-Second Read

• Positive gearing means your rental income exceeds your property’s expenses. You turn a profit, and pay tax on it.
• Negative gearing means expenses exceed rental income. You run a loss, betting on capital growth to make up the difference over time.
• Since 2019, ring-fencing rules mean a negative-gearing loss can’t offset your salary or wages. It only offsets other rental income, or carries forward to future years.
• Full interest deductibility returned from 1 April 2025. That narrows the gap between the two strategies for geared investors, but doesn’t remove the ring-fencing limitation.
• Neither strategy is “better.” The right one depends on your income, your risk tolerance, and what you’re prioritising — cash flow or growth.

We work through both strategies, what ring-fencing actually changed, two worked examples, and a checklist to help you decide which fits your situation.

 

 

What Is Positive Gearing?

Positive gearing happens when your investment property’s income exceeds the expenses of owning and maintaining it. In plain terms: your rental income covers your mortgage payments, maintenance, rates, and every other outgoing, with money left over.

Key points:

• Income exceeds expenses. Rental income covers all costs, leaving a surplus.
• You’re profitable from day one. No waiting on capital growth to make the numbers work.
• You pay tax on the profit. Normal deductions — interest, repairs, management fees — still reduce what’s taxable.
• It’s a buffer against shocks. A positively geared property has more room to absorb an interest rate rise or an unexpected repair than one running tight or negative.

What Is Negative Gearing?

Negative gearing is the opposite. Expenses exceed rental income, and the property runs at a loss. Investors accept this shortfall, expecting capital growth to eventually outweigh it.  This is and has been the most common scenario for some years – mostly because finding a cashflow-positive rental property is challenging.

Key points:

• You’re operating at a loss. Rental income doesn’t cover your outgoings.
• The loss is deductible — but ring-fenced. More on this below, since it’s the part most often misunderstood.
• It’s a long-term strategy. It banks on capital gains rather than rental income to deliver the return.
• It carries higher risk. A negatively geared property is more exposed to interest rate rises or a stagnant market. There’s no income buffer to absorb the hit.

The Ring-Fencing Correction: What “Tax Benefits” Actually Means Today

Here’s the detail that trips up more investors than anything else in this comparison. It’s common to hear that negative gearing lets you “claim the loss against your other income” — offsetting a rental loss against your salary or wages to shrink your overall tax bill. That hasn’t been true since the 2019–20 income year. That’s what ring-fencing is.

The residential property deduction (ring-fencing) rules mean a rental loss can only offset other rental income — not salary, wages, or business income. If you don’t have other rental income to absorb it, the loss carries forward to future years instead. It waits until the property, or your portfolio, turns a profit.

This changes the negative gearing calculation considerably. The “tax benefit” isn’t an immediate refund reducing your overall tax bill. It’s a deferred benefit, banked for later. Investors weighing up negative gearing today need to plan around that deferral, not the pre-2019 version of how this used to work.

Where Interest Deductibility Fits In

Interest is usually the single biggest expense pushing a property into negative territory. That picture improved for geared investors from 1 April 2025. Full interest deductibility was restored then, after several years of phased limitation. A highly-geared property now gets the full benefit of its interest deduction again. That narrows the gap between positive and negative gearing compared to the 2021–2025 period. It doesn’t change the ring-fencing limitation on how any resulting loss can be used, though.

Comparing the Two Strategies

Positive gearing gives you immediate returns and a real margin of safety — your investment funds itself, and then some. The trade-off is availability. Positively geared properties are harder to find in markets with high prices relative to rent, and finding one often means compromising on location or growth potential.

Negative gearing trades that immediate cash flow for exposure to capital growth. The tax loss provides some offset, though it’s deferred under ring-fencing rather than immediate. It demands more financial headroom, since you need to fund the shortfall from your own pocket in the meantime. It also carries more risk if interest rates rise or growth doesn’t materialise on the timeline you expected.

Worked Examples

As usual, let’s see how this works in practice.

Annie buys a positively geared property. Priya puts down a larger deposit on a modest, well-located property. Her rental income comfortably covers the mortgage, rates, insurance and management fees, with a small surplus left over each month. She pays tax on that surplus. The property funds itself entirely, though — she never needs to top it up from her salary, and it gives her serviceability headroom for a future purchase.

Doug buys a negatively geared property in a higher-growth area. Daniel puts down a smaller deposit on a property in an area he expects to grow faster. He accepts a rental shortfall of a few hundred dollars a month. That loss carries forward under the ring-fencing rules, since Daniel has no other rental income to offset it against yet. He’s comfortable funding the shortfall from his salary in the meantime. He’s betting that capital growth over the next several years will outweigh the cumulative cost — but he’s gone in with his eyes open about the fact that the tax loss won’t reduce his salary tax bill today.

Checklist

• ✅ Work out whether your property will run positive or negative before you commit, not after
• ✅ If negative, confirm whether you have other rental income to offset the loss against, or whether it’ll carry forward instead
• ✅ Factor in full interest deductibility (restored from 1 April 2025) when calculating your likely cash flow
• ✅ Make sure you can comfortably fund a negative-gearing shortfall from other income, for as long as it takes to turn positive
• ✅ Decide whether you’re prioritising cash flow (positive gearing) or growth (often negative gearing) before you start comparing properties
• ✅ Talk to your accountant about how ring-fencing will actually apply to your specific portfolio

Common Questions

Can I still offset a rental loss against my salary? No, not since the 2019–20 income year. Ring-fencing means a rental loss can only offset other rental income, or carry forward to future years.

Does full interest deductibility make negative gearing pointless now? No — it actually helps geared investors, since more of their interest is deductible than during the 2021–2025 limitation period. It doesn’t change the ring-fencing rule on how any resulting loss gets used, though.

Is positive gearing always the safer choice? Generally yes, in terms of cash flow risk, since the property funds itself. It doesn’t automatically mean a better overall return, though — that depends on capital growth too, which negative gearing strategies are often built around.

How do I know which strategy fits me? It depends on your income, your risk tolerance, and your goals. Our guide to rental property yield vs cash flow works through the actual numbers behind this decision in more depth.

Summary

Positive gearing vs negative gearing in New Zealand isn’t just a numbers question. It’s a strategy choice with real tax consequences attached. Positive gearing funds itself and gives you a margin of safety, at the cost of being harder to find. Negative gearing trades cash flow for growth potential, with a tax loss that’s real but deferred under the ring-fencing rules — not an immediate offset against your salary the way it worked before 2019. Full interest deductibility has made negative gearing less costly than it was a few years ago. The fundamental trade-off between the two strategies hasn’t changed, though. The right choice depends on your income, your risk tolerance, and what you’re actually trying to achieve.

Talk to EpsomTax.com About Your Strategy

Whether positive or negative gearing suits you better depends on numbers specific to your situation — your income, your goals, and the property itself.

Contact EpsomTax.com to work through which strategy fits your circumstances. We can also make sure you understand exactly how ring-fencing will apply if you’re considering a negatively geared property. We work with New Zealand property investors every day, and can help you go in with a clear picture rather than outdated assumptions about how the tax rules work.