Negative gearing
Owning an investment that costs more to hold than it earns, so the shortfall reduces your taxable income.
A property is negatively geared when the rent it earns is less than the cost of holding it — loan interest, council rates, insurance, management fees, repairs, and depreciation. That annual shortfall is a loss.
In Australia, you can deduct that loss against your other income, including your salary. So a $10,000 shortfall reduces the income you are taxed on by $10,000, and the tax you save softens the real cost of the loss.
The strategy only makes sense if the property grows in value by more than the accumulated losses. You are deliberately accepting a cashflow loss now in exchange for a hoped-for capital gain later — which is a bet on the market, not a guarantee.
A $10,000 annual shortfall
Rent brings in $26,000 while interest and expenses total $36,000. You deduct the $10,000 loss. On a 37% marginal rate you recover about $3,700 in tax, so the shortfall really costs you $6,300.
The bit people get wrong
Negative gearing does not turn a loss into a profit. You are still out of pocket every year — tax relief only refunds a fraction of the loss, never all of it. Anyone describing it as free money has the maths backwards.
Common questions
Is negative gearing worth it?
Only if capital growth exceeds your cumulative after-tax losses. The higher your marginal tax rate, the more of each loss the tax system absorbs — but the underlying loss is real money leaving your pocket.
What is positive gearing?
The opposite: the property earns more than it costs to hold. The surplus is taxable income, so you pay tax on it, but you are cashflow positive from day one.
Can I negatively gear shares?
Yes. If you borrow to buy income-producing shares and the interest exceeds the dividends, the shortfall is deductible under the same principle.
Run your own numbers
Related terms
Source: Australian Taxation Office