What Is Negative Gearing?
A property or investment is negatively geared when its deductible expenses (including loan interest) exceed rental or investment income. The net loss is deductible against other income, reducing taxable income.
Definition
Negative gearing occurs when the costs of holding an investment asset (mortgage interest, rates, insurance, repairs, depreciation, etc.) exceed the income it generates. Under Australian tax law, the resulting net loss can be offset against other income (such as salary), reducing total taxable income and the resulting tax payable. This makes negative gearing more valuable for higher-income earners who benefit from a higher marginal tax rate deduction. The strategy typically relies on long-term capital growth to generate an overall profit. Upon eventual sale, the CGT discount applies to any capital gain if the asset is held over 12 months.
Example
An investment property earns $24,000 in rent but has $30,000 in deductible expenses (including $20,000 interest). The $6,000 net loss can be deducted against a $100,000 salary, reducing taxable income to $94,000 and saving approximately $2,220 in tax at a 37% marginal rate.