What Is Negative Gearing? Explained with Examples

Negative gearing is one of the most commonly discussed strategies when it comes to property investing.

But despite how often it comes up, there is still a lot of confusion around what it actually means.

At its core, negative gearing is simply when the costs of an investment are higher than the income it generates.

What Is Negative Gearing?

Negative gearing occurs when your investment property (or other income-producing asset) runs at a loss.

In simple terms:

• Rental income is less than expenses
• The shortfall is covered by you
• That loss may be used to reduce your taxable income

The key point is that you are making a loss in the short term, with the expectation of longer-term benefits.

A Simple Negative Gearing Example

Let’s say you purchase an investment property.

• Rental income: $600 per week
• Expenses (interest, rates, maintenance): $800 per week

This leaves a shortfall of:

• $200 per week
• or around $10,400 per year

This loss can generally be used to reduce your taxable income.

For example, if you are on a 37% tax rate:

• tax saving = approximately $3,800
• net cost to you = around $6,600 per year

So while the tax benefit helps, you are still out of pocket.

Why Do People Use Negative Gearing?

The reason negative gearing is used is not for the tax benefit alone.

It is usually part of a broader strategy focused on long-term growth.

The idea is:

• You hold an asset that may increase in value over time
• The rental income may improve over time
• The tax benefit helps manage the short-term cash flow

Over time, the combination of growth and income can outweigh the initial losses.

The Role of Capital Growth

This is where negative gearing either works or doesn’t.

If the underlying asset grows in value over time, the overall outcome can be positive.

If it does not, the strategy becomes much harder to justify.

This is why focusing only on the tax benefit can be misleading.

The investment itself still needs to stand on its own.

If you are also thinking about how tax applies when selling an asset, it is worth understanding how capital gains tax works:
What is Capital Gains Tax?

Important Considerations

Negative gearing is not a one size fits all strategy.

Things to consider include:

• your cash flow and ability to fund the shortfall
• your timeframe for holding the asset
• the quality and long term potential of the investment
• how it fits within your broader financial plan

Bringing It Back to Your Plan

Negative gearing can be effective when used as part of a well-structured, long term strategy.

But it should not be the reason for making an investment.

The goal is not to create a tax deduction.

It is to build wealth over time, with tax being one part of the overall outcome.

General Advice Warning

The information above is general in nature and does not take into account your personal objectives, financial situation or needs. Before acting on any strategy, you should consider whether it is appropriate for you and seek personalised advice.