Negative Gearing: A Strategy for Property Investors

Negative gearing is one of the most widely discussed and utilized tax strategies in Australian property investment. But what exactly does it mean, and is it right for your portfolio?

What is Negative Gearing?

A property is negatively geared when the costs of owning it (interest on the loan, bank charges, maintenance, repairs, and depreciation) outweigh the income it generates (rent). Simply put, the property operates at a loss.

Under Australian tax law, this net rental loss can be offset against other income you earn, such as your salary. This reduces your overall taxable income, resulting in less tax payable.

Why Invest to Make a Loss?

It sounds counterintuitive to intentionally lose money. However, investors use negative gearing with the expectation that the capital growth of the property will ultimately outpace the annual holding losses.

The tax deductions cushion the blow of holding an expensive asset while waiting for its value to appreciate over the long term.

A Practical Example

Suppose you earn $100,000 from your job. Your investment property earns $25,000 in rent but costs $35,000 to hold (including interest and depreciation).

You have a shortfall of $10,000. You can deduct this $10,000 from your $100,000 salary, meaning you only pay tax on $90,000. This could yield a substantial tax refund at the end of the financial year.

The Risks to Consider

• Cash Flow Pressure: You must have enough surplus income to fund the ongoing shortfall out of your own pocket.

• Market Reliance: The strategy only works if the property's capital growth exceeds your total losses over the holding period. If property prices fall, you lose on both cash flow and capital.

• Interest Rate Risk: If interest rates rise, your holding costs increase, widening the shortfall.

Negative gearing shouldn't be the sole reason to buy a property. The underlying asset must have strong fundamentals and growth potential to make the initial losses worthwhile.

Run the Numbers First

Before committing to a negatively geared strategy, model the real cash impact. Our Cash Flow Calculator lets you input your rental income, loan costs, and expenses to see your actual weekly out-of-pocket position. If you're still at the buying stage, the Borrowing Calculator will show you how much you can realistically borrow given your income and existing commitments.